Institutional Bias, Risk, and Workers’ Risk Aversion

Abstract

The collapse of central planning in Central and Eastern Europe has brought greater attention to labor-managed firms (LMFs) as alternatives to both Soviet-type enterprises and conventional capitalist firms. LMFs are firms where labor either holds positions of power or is the ultimate decision-making body. LMFs are democratic organizations; decision making is based on the democratic principle of one person, one vote. This differs sharply from decision making within conventional capitalist enterprises, where decision making is based on the undemocratic principle of one share, one vote. 1 LMFs are both owned and controlled by workers. Capitalmanaged firms (CMFs) are firms where labor holds little or no ownership and exercises no control (the dominant species), or where labor nominally owns the firm, but where control is vested in managerial elites (as is often the case with Employee Stock [or Share] Ownership Plans). Workers associated with LMFs are commonly referred to as members, while workers associated with CMFs are known as employees [see Ellerman 1990 for a fuller exposition].2 An often-cited, and quite popular, explanation for the dearth of LMFs is workers' risk aversion. Risk-averse workers are said to prefer the contractually fixed remuneration granted under employee status to the income fluctuations associated with membership with LMFs [see Meade 1972; Buck 1982; Drago 1986; Fanning and McCarthy 1986; Conte 1986; Ben-Ner 1988; Dreze 1993]. Thus, risk aversion shapes organizational design; workers are said to reveal a preference for organizations that insulate them from market fluctuations. LMFs are generally believed to be a more risky option for workers. However, this paper argues that while some risks are intrinsic to the nature of entrepreneurship, other risks associated with alternative organization structures are correlated