Risk and Lack of Diversification under Employee Ownership and Shared Capitalism
Some analysts view risk as the Achilles Heel of employee ownership and to some extent variable pay plans such as profit sharing and gainsharing. Workers in such "shared capitalist" firms may invest too much of their wealth in the firm, contrary to the principle of diversification. This paper addresses whether the risk in shared capitalism makes it unwise for most workers or whether the risk can be managed to limit much of the loss of utility from holding the extra risk. We create an index of financial security based on worker pay and wealth, and find that workers who feel financially insecure exhibit fewer of the positive outcomes associated with shared capitalism, and are less interested than other workers in receiving more employee ownership or even more profit sharing in their workplaces. This response is substantially lessened, however, when accounting for worker empowerment, good employee relations, and high-performance work bundles that appear to buffer worker response toward risk and increase interest in shared capitalism plans. We also discuss portfolio theory which suggests that any risky investment -- including stock in one's company -- can be part of an efficient portfolio as long as the overall portfolio is properly diversified. We show that given estimates of risk aversion parameters, workers could prudently hold reasonable proportions of their assets in employee stock ownership of their firm with only a modest loss in utility due to risk. A good strategy for firms is to personalize individual portfolios on the basis of worker characteristics and preferences, developing investment strategies that would diversify each worker's entire portfolio in ways consistent with individual risk preferences.
|Date of creation:||Aug 2008|
|Date of revision:|
|Publication status:||published as Risk and Lack of Diversification under Employee Ownership and Shared Capitalism , Joseph R. Blasi, Douglas L. Kruse, Harry M. Markowitz. in Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options , Kruse, Freeman, and Blasi. 2010|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Peter Cappelli & David Neumark, 2001.
"Do "high-performance" work practices improve establishment-level outcomes?,"
Industrial and Labor Relations Review,
ILR Review, Cornell University, ILR School, vol. 54(4), pages 737-775, July.
- David Neumark & Peter Cappelli, 1999. "Do "High Performance" Work Practices Improve Establishment-Level Outcomes?," NBER Working Papers 7374, National Bureau of Economic Research, Inc.
- Richard Freeman & Douglas Kruse & Joseph Blasi, 2008.
"Worker Responses To Shirking Under Shared Capitalism,"
NBER Working Papers
14227, National Bureau of Economic Research, Inc.
- Richard B. Freeman & Douglas L. Kruse & Joseph R. Blasi, 2010. "Worker Responses to Shirking under Shared Capitalism," NBER Chapters, in: Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options, pages 77-103 National Bureau of Economic Research, Inc.
- Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151.
- Kroll, Yoram & Levy, Haim & Markowitz, Harry M, 1984. " Mean-Variance versus Direct Utility Maximization," Journal of Finance, American Finance Association, vol. 39(1), pages 47-61, March.
- Tversky, Amos & Kahneman, Daniel, 1986. "Rational Choice and the Framing of Decisions," The Journal of Business, University of Chicago Press, vol. 59(4), pages S251-78, October.
- Pulley, Lawrence B., 1981. "A General Mean-Variance Approximation to Expected Utility for Short Holding Periods," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(03), pages 361-373, September.
- Akerlof, George A, 1979. "The Case against Conservative Macroeconomics: An Inaugural Lecture," Economica, London School of Economics and Political Science, vol. 46(183), pages 219-37, August.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- Yusif Simaan, 1993. "What is the Opportunity Cost of Mean-Variance Investment Strategies?," Management Science, INFORMS, vol. 39(5), pages 578-587, May.
- Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-41, September.
- Daniel Kahneman, 2003. "A Psychological Perspective on Economics," American Economic Review, American Economic Association, vol. 93(2), pages 162-168, May.
- Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1986. "Fairness and the Assumptions of Economics," The Journal of Business, University of Chicago Press, vol. 59(4), pages S285-300, October.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:14229. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.