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Corporate governance, entrenched labor, and economic growth

  • William R. Emmons
  • Frank A. Schmid

The German system of codetermination contributes to the entrenchment of labor. We show in a two-period model of project choice that entrenched labor leads to underinvestment and overstaffing. We provide empirical evidence that German firms subject to codetermination with equal representation of workers on supervisory boards during 1989-93 were, on average, overstaffed. In addition, the fraction of employees in codetermined firms has decreased over time. The expanded reach of codetermination during the mid-1970s therefore may have contributed to the deterioration of German economic growth performance beginning at about that time through underinvestment, overstaffing, and costly migration of business activity away from firms subject to codetermination.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2001-023.

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Date of creation: 2001
Date of revision:
Handle: RePEc:fip:fedlwp:2001-023
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  1. FitzRoy, Felix R & Kraft, Kornelius, 1993. " Economic Effects of Codetermination," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(3), pages 365-75.
  2. Julian Franks & Colin Mayer, 2001. "Ownership and Control of German Corporations," OFRC Working Papers Series 2001fe11, Oxford Financial Research Centre.
  3. Gary Gorton & Frank Schmid, 2000. "Class Struggle Inside the Firm: A Study of German Codetermination," Center for Financial Institutions Working Papers 00-36, Wharton School Center for Financial Institutions, University of Pennsylvania.
  4. Halvorsen, Robert & Palmquist, Raymond, 1980. "The Interpretation of Dummy Variables in Semilogarithmic Equations," American Economic Review, American Economic Association, vol. 70(3), pages 474-75, June.
  5. Stewart C. Myers, 2000. "Outside Equity," Journal of Finance, American Finance Association, vol. 55(3), pages 1005-1037, 06.
  6. Jensen, Michael C & Meckling, William H, 1979. "Rights and Production Functions: An Application to Labor-managed Firms and Codetermination," The Journal of Business, University of Chicago Press, vol. 52(4), pages 469-506, October.
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