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Collective Choice and Control Rights in Firms

Author

Listed:
  • Gregory K. Dow

    (Simon Fraser University)

  • Gilbert L. Skillman

    (Wesleyan University)

Abstract

Recent writers have asserted that firms controlled by workers are rare because workers have diverse preferences over firm policies, and thus suffer from high transaction costs in making collective decisions. This is contrasted with firms controlled by investors, who all support the goal of wealth maximization. However, the source of the asymmetry between capital and labor has not been clearly identified. For example, firms could attract labor inputs by selling transferable shares, and well-known unanimity theorems from the finance literature carry over to models of this kind. We resolve this puzzle by arguing that because financial capital is exceptionally mobile, capital markets are sufficiently competitive to induce unanimity. The lower mobility of human capital implies that labor markets are monopolistically competitive and hence that unanimity cannot be expected in labor-managed firms. Moreover, such firms are vulnerable to takeover by investors while capital-managed firms are substantially less vulnerable to takeover by workers.

Suggested Citation

  • Gregory K. Dow & Gilbert L. Skillman, 2005. "Collective Choice and Control Rights in Firms," Microeconomics 0509003, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpmi:0509003
    Note: Type of Document - pdf; pages: 25. 25 page pdf file including title page and 3 pages of references; no graphs or tables
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    References listed on IDEAS

    as
    1. Dreze, Jacques H & Hagen, Kare P, 1978. "Choice of Product Quality: Equilibrium and Efficiency," Econometrica, Econometric Society, vol. 46(3), pages 493-513, May.
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    3. Oliver D. Hart, 1979. "Monopolistic Competition in a Large Economy with Differentiated Commodities," Review of Economic Studies, Oxford University Press, vol. 46(1), pages 1-30.
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    5. Hart, Oliver D, 1979. "On Shareholder Unanimity in Large Stock Market Economies," Econometrica, Econometric Society, vol. 47(5), pages 1057-1083, September.
    6. Gregory Dow, 1996. "Replicating Walrasian equilibria using markets for membership in labor-managed firms," Review of Economic Design, Springer;Society for Economic Design, vol. 2(1), pages 147-162, December.
    7. Louis Makowski, 1983. "Competitive Stock Markets," Review of Economic Studies, Oxford University Press, vol. 50(2), pages 305-330.
    8. Dow,Gregory K., 2003. "Governing the Firm," Cambridge Books, Cambridge University Press, number 9780521818537, October.
    9. Michael Magill & Martine Quinzii, 2002. "Theory of Incomplete Markets, Volume 1," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262632543, December.
    10. Sadanand, Asha B & Williamson, John M, 1991. "Equilibrium in a Stock Market Economy with Shareholder Voting," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(1), pages 1-35, February.
    11. Dow, Gregory K., 1986. "Control rights, competitive markets, and the labor management debate," Journal of Comparative Economics, Elsevier, vol. 10(1), pages 48-61, March.
    12. McKelvey, Richard D, 1979. "General Conditions for Global Intransitivities in Formal Voting Models," Econometrica, Econometric Society, vol. 47(5), pages 1085-1112, September.
    13. Makowski, Louis & Pepall, Lynne, 1985. "Easy Proofs of Unanimity and Optimality without Spanning: A Pedagogical Note," Journal of Finance, American Finance Association, vol. 40(4), pages 1245-1250, September.
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    Citations

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    Cited by:

    1. Natália Monteiro & Geoff Stewart, 2015. "Scale, Scope and Survival: A Comparison of Cooperative and Capitalist Modes of Production," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(1), pages 91-118, August.
    2. Gregory Dow, 2001. "Allocating Control over Firms: Stock Markets versus Membership Markets," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 18(2), pages 201-218, March.
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    4. David Kelsey & Frank Milne, 2010. "Takeovers and cooperatives: governance and stability in non-corporate firms," Journal of Economics, Springer, vol. 99(3), pages 193-209, April.
    5. Giuseppe Danese & Luigi Mittone, 2015. "Trust and trustworthiness in experimental organizations," CEEL Working Papers 1501, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.
    6. Dow, Gregory K. & Putterman, Louis, 2000. "Why capital suppliers (usually) hire workers: what we know and what we need to know," Journal of Economic Behavior & Organization, Elsevier, vol. 43(3), pages 319-336, November.
    7. Damion Jonathan Bunders & Agnes Akkerman, 2023. "Commitment issues? Analysing the effect of preference deviation and social embeddedness on member commitment to worker cooperatives in the gig economy," Economic and Industrial Democracy, Department of Economic History, Uppsala University, Sweden, vol. 44(4), pages 1007-1026, November.
    8. Gregory K. DOW, 2018. "The Theory Of The Labor-Managed Firm: Past, Present, And Future," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 89(1), pages 65-86, March.
    9. Dow,Gregory K., 2019. "The Labor-Managed Firm," Cambridge Books, Cambridge University Press, number 9781107589650, January.

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    More about this item

    Keywords

    capitalist firms; labor-managed firms; collective choice; preference heterogeneity; unanimity; voting; membership markets; control rights;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D2 - Microeconomics - - Production and Organizations
    • D3 - Microeconomics - - Distribution
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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