Monday, 1 August 2016

High human capital and worker-owned firms

In a recent paper in the Journal of the Knowledge Economy I argued, via a simple model of the firm based on the reference point approach to the firm, that having a firm based on a homogeneous group of human capital leads to a different organisational form than that of a firm which involves a heterogeneous group of human capital.

To illustrate this idea I considered the ownership structure of professional sports teams. Heterogeneity in playing talent—playing talent being the human capital here—and thus in earning potential is a disincentive to the formation of a worker cooperative, an organisation which normally involves (rough) equality in payment,  since those players with the greatest earning potential, the largest outside options, will transfer away from the cooperative to maximise their income stream. Thus, a worker-owned team would have few, if any, star players, a handicap in the winner-takes-all world of professional sports.

But this argument could be applied to any worker-owned firm in which their is a range of worker ability. My argument would mean that the given a relatively flat compensation structure high ability workers would be more likely to leave a worker-owned firm.

In a new paper in the latest issue of the Economic Journal Gabriel Burdín argues that Equality Under Threat by the Talented: Evidence from Worker-Managed Firms.

The abstract of the paper reads:
Does workplace democracy engender greater pay equality? Are high-ability individuals more likely to quit egalitarian organisational regimes? The article revisits this long-standing issue by analysing the interplay between compensation structure and quit behaviour in the distinct yet underexplored institutional setting of worker-managed firms. The analysis is based on novel administrative data sources, which allow constructing a simple ordinal measure of the workers' ability type. The article's key findings are that worker-managed firms have a more compressed compensation structure than conventional firms, and high-ability members are more likely than other members to exit. (Emphasis added.)
Thus Burdin finds what you would expect, high-ability workers (players) are more likely to exit worker-owned firms (teams) leaving such firms (teams) at a disadvantage compared to employee based firms.


Brett said...

That would explain why cooperatives tend to be among similar workers, like a partnership between lawyers or a farmers' cooperative (although the difficulties in management would be present as well - it's probably not a coincidence that the few big cooperatives have managers and indirect democracy governance).

Paul Walker said...

Brett. Yes I think this does tell us something about why cooperatives tend to be small and be based on similar types of workers. Both getting larger and more heterogeneous in membership causes problems for cooperatives.