Strategic Investment: The Labor-Managed Firm and the Profit-Maximizing Firm

Abstract

A three-stage game model of duopoly between a labor-managed firm and a profit-maximizing firm is developed. In the first stage of the game, the firms simultaneously decide whether to enter. In the second stage, both firms use investment as the strategic variables and commit to the investment levels. In the third stage, they play a Nash quantity game. We show that a case occurs where the labor-managed firm employs more capital than does the profit-maximizing firm contrary to the results of J. Vanek (The General Theory of Labor-Managed Market Economies.Ithaca, NY: Cornell Univ. Press, 1970) and J. Meade (“The Theory of Labour-Managed Firms and Profit Sharing.”Econom. J.82,325s:402–428, Mar. 1972). We also establish that the labor-managed firm adopts more capital-intensive technology and produces more goods than does the profit-maximizing firm.