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http://ssrn.com/abstract=1260582
 
 

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Risk and Lack of Diversification Under Employee Ownership and Shared Capitalism


Joseph Blasi


Rutgers School of Management and Labor Relations - New Brunswick

Douglas L. Kruse


Rutgers University

Harry Markowitz


University of California at San Diego

August 2008

NBER Working Paper No. w14229

Abstract:     
Some analysts view risk as the Achilles Heel of employee ownership and to some extent variable pay plans such as profit sharing and gainsharing. Workers in such "shared capitalist" firms may invest too much of their wealth in the firm, contrary to the principle of diversification. This paper addresses whether the risk in shared capitalism makes it unwise for most workers or whether the risk can be managed to limit much of the loss of utility from holding the extra risk. We create an index of financial security based on worker pay and wealth, and find that workers who feel financially insecure exhibit fewer of the positive outcomes associated with shared capitalism, and are less interested than other workers in receiving more employee ownership or even more profit sharing in their workplaces. This response is substantially lessened, however, when accounting for worker empowerment, good employee relations, and high-performance work bundles that appear to buffer worker response toward risk and increase interest in shared capitalism plans. We also discuss portfolio theory which suggests that any risky investment -- including stock in one's company -- can be part of an efficient portfolio as long as the overall portfolio is properly diversified. We show that given estimates of risk aversion parameters, workers could prudently hold reasonable proportions of their assets in employee stock ownership of their firm with only a modest loss in utility due to risk. A good strategy for firms is to personalize individual portfolios on the basis of worker characteristics and preferences, developing investment strategies that would diversify each worker's entire portfolio in ways consistent with individual risk preferences.

Number of Pages in PDF File: 46

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Date posted: September 1, 2008  

Suggested Citation

Blasi, Joseph and Kruse, Douglas L. and Markowitz, Harry, Risk and Lack of Diversification Under Employee Ownership and Shared Capitalism (August 2008). NBER Working Paper No. w14229. Available at SSRN: http://ssrn.com/abstract=1260582

Contact Information

Joseph R. Blasi (Contact Author)
Rutgers School of Management and Labor Relations - New Brunswick ( email )
Piscataway, NJ 08854
United States
732-445-5444 (Phone)
732-445-2830 (Fax)
Douglas L. Kruse
Rutgers University ( email )
Piscataway, NJ 08854
United States
908-445-5991 (Phone)
908-445-2830 (Fax)
Harry Markowitz
University of California at San Diego ( email )
9500 Gilman Drive
La Jolla, CA 92093-0508
United States
(858) 534-3383 (Phone)
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