Wage-Setting Institutions and Corporate Governance
38 Pages Posted: 28 Jan 2014 Last revised: 15 Dec 2017
Date Written: January 24, 2014
Why do corporate governance law and practice differ across countries? This paper explains how wage-setting institutions influence ownership structures and investor protection laws. In particular, we identify a nonmonotonic relationship between the level of centralization in wage-bargaining institutions and the level of ownership concentration and investor protection laws. As wage setting becomes more centralized, ownership concentration within firms at first becomes more, and then less, concentrated. In addition, the socially optimal level of investor protection laws is decreasing in ownership concentration. Thus, as wage-setting institutions become more centralized, investor protection laws become less and then more protective. This explanation is consistent with the observable pattern of wage-setting structures, ownership concentration, and investor protection legislation across developed countries. While agreeing with recent research that highlights labor as an important corporate stakeholder in shaping corporate governance, a focus on bargaining structures can resolve an important puzzle this research confronts, namely, why Scandinavian countries with higher than average labor strength also have higher than average investor protection legislation.
Keywords: Corporate governance, bargaining centralization, wage-setting structures, legal origin, labor, politics
JEL Classification: G34, K22, K42
Suggested Citation: Suggested Citation