Control rights, competitive markets, and the labor management debate

Abstract

Labor-managed firms are often asserted to display perverse short-run behavior and defective investment incentives. These criticisms rely upon assumed departures from the neoclassical framework of complete and competitive markets, including restricted trading in worker memberships. This paper treats management by capital and by labor as special cases within a common analytical setting, and shows that there is no basis for distinguishing between these two principles of organizational design in a competitive-market environment: capital can be collectively owned by a labor-managed firm without undermining investment incentives. Future debate should thus center on identification of pertinent market failures.