Employee Share Ownership and Privatisation: A Comment

Abstract

Privatisations have often been accompanied by the promotion of wider share ownership, and especially share ownership by employees of the privatised companies. In a recent paper in this JOURNAL Grout (i988) amongst other issues addresses the important problem whether employee share ownership raises or depresses the employees' net incomes. Analysing a specific game he concludes 'that workers in aggregate do not gain from share ownership and do not gain from any fiscal advantage ... that they may receive. Any fiscal advantage is captured by the non-employee shareholder' (p. ioo).' This is a very surprising result which may have important political implications because it would force any union to reject any employee share ownership because it is never in the interest of the workers. But Grout's conclusion is not always true. Choosing a particular specification within his model and determining the equilibrium of his game, we give an example where employees increase their net income by buying employee shares even in the worst possible case of a share price equal to the market value of the shares. Hence, Grout's model cannot be used as argument for a general rejection of employee shares. The organisation of the comment is as follows. We first present Grout's model and then determine the equilibrium for a particular specification which is feasible in his model and which implies that employees will benefit from employee shares. Grout considers a game with three players: the firm, the workers and the non-employee shareholders. Their interaction is treated in a three-stage setting. At stage one shares are offered to the employees. (The purchase of shares by non-employees is not dealt with.) At stage two the non-employee shareholders fix the level of investment. They are able to do that unilaterally because they have the majority of shares. At stage three the firm and the workers enter into wage negotiations. 'This implies a three-stage structure beginning with share sales to employees, then an investment choice followed by wage negotiation. The choice at each stage is made taking' into account its effects on future stages, i.e. we use the notion of the perfect equilibrium' (p. 98). Before the game starts, the government fixes the following variables: first, the maximal degree of employee share ownership, i.e. the percentage 8 of all shares which the employees are offered to buy. All other shares are bought by nonemployees. Second, the issue price of the employee shares, which will be between the market value of the shares and zero. Third, the tax rates on earned