New Economics Papers
on Collective Decision-Making
Issue of 2005‒09‒17
one paper chosen by

  1. Collective Choice and Control Rights in Firms By Gregory K. Dow; Gilbert L. Skillman

  1. By: 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.
    Keywords: capitalist firms, labor-managed firms, collective choice, preference heterogeneity, unanimity, voting, membership markets, control rights
    JEL: D1 D2 D3 D4
    Date: 2005–09–09

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