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Allocating Control Over Firms: Stock Markets Versus Membership Markets

The new institutional economics regards the firm as a set of incomplete contracts among input suppliers. The theory of the firm must therefore explain how decision-making powers are allocated. Two leading candidates for such control rights are capital suppliers and labor suppliers. Most large enterprises in developed economies award formal control to investors rather than workers. I suggest here that this asymmetry can be traced in part to differences between stock markets and membership markets as institutional mechanisms for allocating control over firms. The attractive theoretical properties of membership markets are examined, along with some factors that may account for their rarity in practice. These practical difficulties help explain the rarity of labor-managed firms themselves, along with various facts about their design, behavior, and distribution across industries.

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File URL: http://www.sfu.ca/econ-research/RePEc/sfu/sfudps/dp00-03.pdf
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Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp00-03.

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Length: 51 pages
Date of creation: 2000
Date of revision: Feb 2000
Handle: RePEc:sfu:sfudps:dp00-03
Note: An earlier draft was presented at the NBER Conference on "Shared Capitalism" in Washington, D.C. on May 22-23, 1998
Contact details of provider: Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
Phone: (778)782-3508
Fax: (778)782-5944
Web page: http://www.sfu.ca/economics.html

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