ESOP Fables: The Impact of Employee Stock Ownership Plans on Labor Disputes

40 Pages Posted: 15 Sep 2008

See all articles by Peter Cramton

Peter Cramton

University of Maryland - Department of Economics

Hamid Mehran

Independent

Joseph S. Tracy

Federal Reserve Bank of New York; National Bureau of Economic Research (NBER)

Date Written: September 2008

Abstract

By the early 1990s, employee stock ownership plans (ESOPs) had become as prevalent in unionized firms as in nonunionized firms. However, little research has been devoted to examining the implications of ESOPs for collective bargaining or, more generally, for cross ownership. In this paper, we extend the signaling model of Cramton and Tracy (1992) to allow partial ownership by the union. We demonstrate that ESOPs create incentives for unions to become weaker bargainers. As a result, the model predicts that ESOPs will lead to a reduction in strike incidence and in the fraction of labor disputes that involve a strike. We examine these predictions using U.S. bargaining data from 1970 to 1995. The data suggest that ESOPs do increase the efficiency of labor negotiations by shifting the composition of disputes away from costly strikes. Consistent with improved bargaining efficiency, we find that the announcement of a union ESOP leads to a 50 percent larger stock market reaction when compared with the announcement of a nonunion ESOP.

Keywords: collective bargaining, ESOP, cross ownership, incomplete information, strikes, labor disputes

JEL Classification: J52, C78, D82

Suggested Citation

Cramton, Peter C. and Mehran, Hamid and Tracy, Joseph, ESOP Fables: The Impact of Employee Stock Ownership Plans on Labor Disputes (September 2008). FRB of New York Staff Report No. 347. Available at SSRN: https://ssrn.com/abstract=1266717 or http://dx.doi.org/10.2139/ssrn.1266717

Peter C. Cramton

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-6987 (Phone)
301-405-3542 (Fax)

Hamid Mehran (Contact Author)

Independent ( email )

No Address Available

Joseph Tracy

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6344 (Phone)
212-720-2630 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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