Labor-managed Firm Research Articles

Custom and the Firm

This comment is part of a symposium on Ekkehart Schlicht, On Custom in the Economy (1998)

Spatial competition with profit-maximising and labour-managed firms

The nature of the equilibria arising under spatial differentiation is investigated here in a duopoly model, where at least one firm maximises value added per worker. The study shows that if firms' objectives differ, there exists a subgame perfect equilibrium in pure strategies, which is possibly characterised by asymmetric locations. If both firms are labour-managed, there exists a (symmetric) subgame perfect equilibrium in pure strategies with firms located at the first and third quartiles, if and only if the setup cost is low enough. Otherwise, undercutting is profitable.

On the optimal production and location of a labor-managed firm

This paper endeavors to introduce space into the theory of the Labor-Managed firm (LMF) and to investigate its optimal production and location decisions. It is shown that the degree of returns to scale plays a key role in the determination of optimal production and location for an LMF, in particular, that the optimal location of an LMF is farther away from (closer to) the market as compared to a profit-maximizing firm (PMF) if the production function is of increasing (decreasing) returns to scale. We also demonstrate that the optimum location of an LMF moves closer towards the market as demand increases, regardless of whether the production function is of increasing or decreasing returns to scale. This finding is in sharp contrast with that in a capitalist economy.

Book Reviews: Kenji Kondo, Makoto Tawada, Takafumi Matsuba "Economics on Labor-Managed Firms and Labor Migration"

Book Reviews: Kenji Kondo, Makoto Tawada, Takafumi Matsuba "Economics on Labor-Managed Firms and Labor Migration"

On the Predictability of Kibbutz Financial Distress: A Principal Component Analysis with Bootstrap Confidence Intervals

This paper proposes an econometric model for conditional forecasting of kibbutz financial distress for a range of one to three years. The primary interest in examining the economic performance of the kibbutz is that its driving characteristic is collective rather than individual profit-maximizing. Thus, this study contributes to bridging the gap between literature on labor-managed firms and the theoretical and empirical models aimed at predicting financial distress. This study is also motivated by the kibbutz debt crisis of the mid-1980s. The annual change in productive equity, scaled by either productive assets or annual sales, is assumed to represent kibbutz financial confidence. The attribute vector contains 26 explanatory variables defined over eight different dimensions: liquidity, profitability, cash flow, operating efficiency and growth, capital structure, saving rate, demography, and size. The model as a whole exhibits high statistical significance, efficiency of forecast, and a good fit. It outperforms the naive forecast model in all calculated measures of dispersion. This outcome is reaffirmed by the bootstrap simulation. The findings of this paper suggest that financially distressed kibbutzim are less profitable, tend to be highly leveraged, are characterized by low and even negative saving rates, and have a higher social burden. The paper provides empirical support for the emergency cash reserve, the optimal capital structure, and the heterogeneity hypotheses. The results are also consistent with predictions of organization theory derived from nontransferability of member rights.

Rights and Production Functions: An Application to Labor Managed Firms and Codetermination

It is traditional in the theory of the firm to define the production opportunity set available to the firm in terms of its boundary the maximum attainable set of output quantities for various input quantities, given the state of technology and knowledge. This boundary is the production function of the firm. One of our purposes here is to point out the dependence of such production functions on the structure of property rights and contracting rights within which the firm exists. We redefine the production function in order to recognize the dependence of output on the structure of property and contracting rights. That expanded framework is then used to discuss a concrete set of problems surrounding the role of labor in the firm ranging from the labor-managed firm system (in which tradable capital value residual claims [common stock] are legally prohibited), and the codetermination and industrial democracy movements (in which management participation by labor is required by law), to cooperatives and professional partnerships (i.e., quasi-labor-managed firms which arise out of the voluntary contracting process), and the capitalist corporation.

A Note on Comparative Statics for a Labor-Managed Firm Engaged in Exporting

The behavior of a labor-managed firm (LMF) producing both for the domestic market and for export is analyzed assuming that it competes with a foreign profit-maximizing firm (PMF) in the export market. Conventional wisdom suggests that a LMF facing an increase of demand in the foreign market will cut sales in this market. We show that, with high enough sales in the domestic market, the LMF will sell less at home and more abroad after an introduction of an export subsidy. We also show that, under the same condition, the LMF will increase foreign sales after a devaluation of the domestic currency. Thus, the LMF reacts in a manner similar to that of a PMF. Hence, this paper reverses the conditional wisdom and extends the results of C.-C. Mai and H. Hwang (J. Comp. Econ. 13, 3:473–48, Sept. 1989) and K. Okuguchi (J. Comp. Econ. 15, 3:476–484, Sept. 1991).J. Comp. Econom., September 2000, 28(3), pp. 619–625. Central European University, Nador u. 9, 1051 Budapest, Hungary and Oskar Lange Academy of Economics, Wroclaw, Poland.

Seniority-Wage System and the Growth of a Labor-Managed Firm

This paper formulates a simple growth model of a labor-managed firm with a seniority-wage system. The seniority-wage system is shown to be an engine for the growth of the labor-managed firm. Moreover, the labor-managed firm has no incentive to grow without the seniority-wage system, which is consistent with the result of A. B. Atkinson (Quart. J. Econ. 87, 3:375–392, Aug. 1973). The short-run and long-run effects of changes in the slope of the wage-tenure profile, the price of output, the rental price of capital, and the discount rate are examined.J. Comp. Econom., September 2000, 28(3), pp. 606–618. Yamaguchi University.

Incentive compatible reward schemes for labour-managed firms

We consider a simple case of team production, where a set of workers have to contribute a single input (say labour) and then share the joint output amongst themselves. Different incentive issues arise when the skills as well as the levels of effort expended by workers are not publicly observable. We study one of these issues in terms of a very simple model in which two types of workers, skilled and unskilled, supply effort inelastically. Thus, we assume away the problem of moral hazard in order to focus on that of adverse selection. We also consider a hierarchical structure of production in which the workers need to be organised in two tiers. We look for reward schemes which specify higher payments to workers who have been assigned to the top-level jobs when the principal detects no lies, distribute the entire output in all circumstances, and induce workers to revel their true abilities. We contemplate two scenarios. In the first one, each individual worker knows only her own type, while in the second scenario each worker also knows the abilities of all other workers. Our general conclusion is that the adverse selection problem can be solved in our context. However, the range of satisfactory reward schemes depends on the informational framework.

Embeddedness, cooperation and popular-economy firms in the informal sector

This paper is motivated by empirical observations on popular-economy firms (PEFs) in the informal sector of Santiago de Chile. These are labor-managed firms (LMFs) embedded in a `popular milieu' where cooperation between their members plays a central role. This paper develops a (partial equilibrium) microeconomic theory of PEFs. Endogeneizing the level of cooperation between the workers, the paper develops a static and a dynamic model to analyze whether embeddedness influences the behavior of the PEF. Embeddedness is assumed to be captured by three different characteristics suggested by the empirical observations. Most of them influence the employment and income levels in the PEF.

Investment and supply effects of industry-indexed bones: The labor managed firm

Investment and supply effects of industry-indexed bones: The labor managed firm

Process innovation and the persistence of monopoly with labour-managed firms

The issue of the persistence of monopoly when at least one labour-managed firm takes part in an auction for a cost-reducing innovation is tackled in this paper. It is shown that (i) when the incumbent is a profit-maximizing firm while the entrant is a labour-managed firm, monopoly persists; (ii) when both firms are labour-managed, monopoly persists only if the technology initially employed by the incumbent is highly inefficient as compared to the new one; and, finally, (iii) when the incumbent is labour-managed while the outsider is a profit seeking agent, then entry always occurs and monopoly changes hands.

Strategic Investment and the Co-Existence of Labor-Managed and Profit-Maximizing Firms

We examine firm profitability in mixed duopoly equilibrium with one labor-managed (LM) firm and one profit-maximizing (PM) firm, and with strategic investment. Conventional wisdom suggests that firms deviating from profit-maximization will suffer forced exit in the long run. We reverse this conclusion. In mixed LM-PM duopoly with strategic investment no equilibrium can have both firms making zero profits, and PM profitability implies LM profitability, but not conversely. Adverse parameter shifts would cause the PM firm to exit first. Empirical evidence is consistent with this prediction of relatively robust market survivability of LM firms.

Dualism, dialogue and organizations: Reflections on organizational transformation and labor-managed firms

We suggest that both our social problems and the ineffectiveness of the instituions constructed to deal with them have a common source: dualistic thinking. We further suggest that this problem severely handicaps current approaches to the reform of the modern organizations, including corporations. More specifically, we argue that dualism is a fundamental flaw of both the organizational transformation approach and the labor-managed firm approach to corporate reform. Finally, we argue that the solution to overcomeing the problem of dualism lies in the discovery of new communication processes. We suggest that one such process that shows great prmise is David Bohm's dialogue.

International Duopoly with a Labor-Managed Firm and a Profit-Maximizing Firm and Strategic Trade Policy

International Duopoly with a Labor-Managed Firm and a Profit-Maximizing Firm and Strategic Trade Policy

Participatory Democracy May Go a Long Way: Comparative Growth Performance of Employee Ownership Firms in New York and Washington States

This article presents results from two studies implemented in the USA from 1990 to 1993. A main finding of the studies was that participatory decision-making in employee ownership firms seems to be a key explanatory variable to relatively faster growth rates than in conventional firms. Other indicative findings on participatory employee ownership firms outperforming conventional participatory firms lead us to hypothesize whether employee ownership and participatory decision-making may have a synergistic performance effect. A longitudinal approach mainly suggests that employee ownership firms perform worse than conventional firms before the inception of an employee ownership programme, but better afterwards. The findings are discussed in relation to economic theories on profit sharing and on participatory and labour-managed firms.

The Comparative Efficiency and Productivity of Labor-Managed and Capital-Managed Firms

The available empirical literature comparing the efficiency and productivity of labor-managed and capital-managed firms is reviewed and meta-analysed. The results suggest that labor-managed firms are not less efficient or less productive than capital-managed firns. Labor-managed firms have lower output-to-labor ratios and even lower capital-to-labor ratios. However, the differences in these ratios are not statistically significant. The labor-managed firm's democratic governance, industrial relations climate, and organisational setting do not appear to adversely affect productivity and efficiency

Strategic Investment and the Co-Existence of Labour-Managed and Profit-Maximising Firms

The authors examine firm profitability in mixed duopoly equilibrium with one labor managed (LM) firm and one profit maximizing (PM) firm, and with strategic investment. Conventional wisdom suggests that firms deviating from profit-maximization will suffer forced exit in the long run. The authors reverse this conclusion. In mixed LM-PM duopoly with strategic investment, no equilibrium can have both firms making zero profits, and PM profitability implies LM profitability, but not the converse. Adverse parameter shifts would cause the PM firm to exit first. Empirical evidence is consistent with this prediction of robust market survivability of LM firms.

Unemployment and Workers' Control

The relationship between democratic workers' control and unemployment is explored. When unemployment arises from labor market distortions, market imperfections, or from information imperfections, labor-managed firms are superior to capitalist firms. The firm's governance and decision making structures then play an instrumental role in the level of unemployment. However, when involuntary unemployment arises from effective demand failures, then workers' control may not be able to maintain or to restore full employment. In such cases, collective and coordinated efforts are needed to reduce the level of involuntary unemployment.

Rate-of-return regulation for a labor-managed firm.

Rate-of-return regulation for a labor-managed firm.