TY  - JOUR
AU  - Gorton,Gary
AU  - Schmid,Frank
TI  - Class Struggle Inside the Firm: A Study of German Codetermination
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7945
PY  - 2000
Y2  - October 2000
UR  - http://www.nber.org/papers/w7945
L1  - http://www.nber.org/papers/w7945.pdf
N1  - Author contact info:
Gary B. Gorton
Yale School of Management
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
Fax: 203/432-8931
E-Mail: Gary.Gorton@yale.edu

Frank Schmid
E-Mail: franky.schmid@gmail.com
AB  - Who should control the firm?  What should be the firm's objective function?  If contracts are incomplete, then the group of input providers that most needs their interests protected should be allocated control rights to the firm.  Existing theories argue that the suppliers of capital are most in need of protection.  We empirically assess this answer by examining the German system of codetermination,' a governance system under which employees are allocated some control rights over corporate assets by law. Codetermination laws require that employees be represented on the (supervisory) board of directors.  If codetermination sufficiently empowers employees, and if stockholders' rights cannot be contractually protected, then employees may redistribute the firm's surplus towards themselves.  In addition, if employee interests are not contractually protected, then employees' may prefer a different objective function for the firm.  For example, employees may hamper capitalist flexibility by resisting restructuring of the firm if that would jeopardize their human capital.  We examine this with particular reference to the unification of East Germany and West Germany, a shock that may have caused employees in the former West to resist restructuring; the more so in codetermined firms.  We also examine whether shareholders respond to codetermination with more concentrated block holdings, perhaps increasing their bargaining power with employees, or with higher leverage, committing more cash to leave the firm.  Finally, we examine the relationship between codetermination and the performance sensitivity of compensation for board members.
ER  -