Working Paper: NBER ID: w14229
Authors: Joseph R. Blasi; Douglas L. Kruse; Harry M. Markowitz
Abstract: Some analysts view risk as the Achilles Heel of employee ownership and to some extent variable pay plans such as profit sharing and gainsharing. Workers in such "shared capitalist" firms may invest too much of their wealth in the firm, contrary to the principle of diversification. This paper addresses whether the risk in shared capitalism makes it unwise for most workers or whether the risk can be managed to limit much of the loss of utility from holding the extra risk. We create an index of financial security based on worker pay and wealth, and find that workers who feel financially insecure exhibit fewer of the positive outcomes associated with shared capitalism, and are less interested than other workers in receiving more employee ownership or even more profit sharing in their workplaces. This response is substantially lessened, however, when accounting for worker empowerment, good employee relations, and high-performance work bundles that appear to buffer worker response toward risk and increase interest in shared capitalism plans. We also discuss portfolio theory which suggests that any risky investment -- including stock in one's company -- can be part of an efficient portfolio as long as the overall portfolio is properly diversified. We show that given estimates of risk aversion parameters, workers could prudently hold reasonable proportions of their assets in employee stock ownership of their firm with only a modest loss in utility due to risk. A good strategy for firms is to personalize individual portfolios on the basis of worker characteristics and preferences, developing investment strategies that would diversify each worker's entire portfolio in ways consistent with individual risk preferences.
Keywords: Employee Ownership; Shared Capitalism; Risk; Diversification
JEL Codes: D81; J33; J54; L23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Economic insecurity score (F52) | Negative attitudes toward shared capitalism (P12) |
| Economic insecurity score (F52) | Weaker preferences for additional shared incentives (C79) |
| Economic insecurity score (F52) | Worse workplace outcomes (J29) |
| Lack of empowerment and poor employee relations (M54) | Exacerbate negative relationship between economic insecurity and worker attitudes (F66) |
| Improving empowerment and employee relations (M54) | Mitigate negative impacts of economic insecurity on worker attitudes and behaviors (J65) |
| High-performance work systems (HPWS) (J33) | Buffer the adverse effects of economic insecurity on attitudes and preferences for variable pay (J33) |