Abstract
ABSTRACTUnder plausible conditions, in a market economy with both democratic and capitalist firms, credit market imperfections imply that the fraction of workers in democratic firms is an increasing function of the share of worker wealth. Our analysis addresses two agency problems that all firms must solve: eliciting effort from a team of workers and choosing the appropriate level of risk, in a situation where neither effort nor risk is contractually specified. The democratic firm enjoys a relative advantage in dealing with the agency problems surrounding labor, while the capitalist firm has a relative advantage in dealing with agency problems involving risk‐bearing.
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