Labor Representation in Governance as an Insurance Mechanism

Abstract We hypothesize that labor participation in governance helps improve risk sharing between employees and employers. It provides an ex post mechanism to enforce implicit insurance contracts protecting employees against adverse shocks. Results based on German establishment-level data show that...

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Bibliographic Details
Published in:Review of Finance 2018-07, Vol.22 (4), p.1251-1289
Main Authors: Kim, E Han, Maug, Ernst, Schneider, Christoph
Format: Article
Language:English
Subjects:
Economic models
Employees
Risk sharing
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Summary:Abstract We hypothesize that labor participation in governance helps improve risk sharing between employees and employers. It provides an ex post mechanism to enforce implicit insurance contracts protecting employees against adverse shocks. Results based on German establishment-level data show that skilled employees of firms with 50% labor representation on boards are protected against layoffs during adverse industry shocks. They pay an insurance premium of 3.3% in the form of lower wages. Unskilled blue-collar workers are unprotected against shocks. Our evidence suggests that workers capture all the gains from improved risk sharing, whereas shareholders are no better or worse off than without codetermination.
ISSN:1572-3097
1573-692X
1875-824X
DOI:10.1093/rof/rfy012