Employer’s moral hazard and the emergence of worker cooperatives

We argue that in a capitalist enterprise the need to fix wages is a consequence of the asymmetric distribution of decision-making power, since this power can entail the use of private information in favor of the strongest contractual party (the employer), and against the weaker contractual party (the employee). The capitalist entrepreneur holds control rights over the production and strategic decision making in the firm, up to the power to liquidate it. S/he moreover has contrasting interests with the workers he hires, and has private information on market conditions and risks. He has therefore the possibility to take decisions whose negative consequences are borne by workers, for example in terms of lower wages, which would increase his/her profits. In order to escape the emerging risk of employer’s moral hazard, a fixed wage is paid, but this implies that workers face the risk of layoffs. The organizational form that can guarantee employment stability (by allowing wages to fluctuate) is therefore the worker cooperative: here, we depart from the framework of the interaction between a principal and an agent with contrasting interests and private information, because workers themselves have decision making power. The case of worker coops falls into the category of self-organized collective action among a “group of principals”. Hence we observe greater employment stability in worker coops, as demonstrated by various empirical studies