Transcript Are Workers' Enterprises entry policies conventional

Are Workers' Enterprises entry
policies conventional?
Gianpaolo Rossini University of Bologna
Michele Moretto
University of Padova
ASSETAnnual Conference, Padova 1-3 November 2007
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Introduction

LMFs exist in most countries and industries
(Craig and Pencavel, 1992, 1995; Moretto and
Rossini, 2003).
 LM banks in developed and emerging countries
contribute to equity and financial stability (Hesse
and Cihàk, 2007): market share of some 10%.
 LMF close to (US Census) Nonemployer
(Moretto and Rossini, 2007 - SEJ) and
Partnership, popular among infant firms in high
tech sectors
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
LMF vis à vis conventional profit maximizing firm
(PMF) in perfect competition: short run (SR)
differences, long run (LR) coincidence.
 SR: supply reacts negatively to price; odd labour
demand. Higher fixed costs -> larger
membership.
These reactions: based on the assumption that, in
the SR, LMF can change membership size set at
the foundation.
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New theory of Workers' Enterprises (WE)
(Sertel, 1987; 1991; 1993; Fehr and
Sertel, 1993).
 WEs similar to LMFs, but for membership:
A) size chosen at entry, not varied in SR.
B) competitive market for memberships ->
number of members can change in SR.
In WE "perversities" of the LMF shy away.

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
LR: LMFs, WEs and PMF are
indistinguishable.
LR comparison between PMF and WE
confined to static framework -> entry not
modeled.
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AIM OF THE PAPER
Model entry with uncertainty and
irreversibility and test LR convergence of
WE and PMF.
 Provide an interpretation of persistence of
WEs (Hesse and Cihàk, 2007) despite
ongoing mantra of their imminent demise.

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AN OPTION - LIKE SCENARIO
In an option-like scenario, firms observe
market demand and choose size and
price, that triggers entry regardless of
market structure (Leahy, 1993, Grenadier
2002).
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With certainty in a dynamic setting trigger
prices of WEs and PMFs are equal
(Moretto and Rossini, 2005) with labour
fixed after entry.
 Labour (firm) specific -> firms reluctant to
vary it. Rigidity makes PMF close to WE.

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The textbook case

WE sets membership maximizing surplus per
worker [value added (y(p;L)) minus market
wage (w)]:
y(p;L) – w = [(p Q(L) - I)/L] - w
(1)
SR FOC:
p Q′(LWESR) = y (p;LWESR)
(2)
if y(p;L) – w > 0
labour of WE is smaller than PMF.
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Long Run features
New firms enter at the Marshallian point:
pWE = AC(LMES) ≡ (w LMES + I) / [Q(LMES)], (3)
with AC(LMES) = LR average total cost at
the MES.
PMF and WE behave the same way, i.e.
LWELR = LPMFLR. No rents.
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WE's entry under uncertainty
Assumptions
entry sunk cost
2. Entry can be delayed
3. Market price driven by trendless stochastic
differential equation:
dpt = σ pt dBt with σ>0 and p₀=p,
(4)
5. The project funded by WE members
6. L fixed after entry
1.
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
If p is high enough, WE enters.
First, for any L, the individual option to enter is
computed.
Then, candidate members of WE choose L
maximizing their (option) value at entry and the
investment timing (T):
fWE(p;L) = max E₀[(y(pT;L) - w) e-ρT|p₀=p]
(5)
 Each employee invests at T when pt reaches an
upper value pWE.
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The WE invests when the price exceeds the
break-even threshold:
pWE = [β/(β-1)]AC(L)
(6)
the (deterministic) Marshall trigger AC(L)
multiplied by β/(β-1)>1, due to irreversible
entry.
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Long Run equilibria
LR: option value to wait is zero (i.e. fwE = 0).
However, by the infinite elasticity of demand,
the optimal entry trigger (6) is not altered
(Leahy, 1993, Dixit and Pindyck, 1994,
Grenadier, 2002).
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Proposition
a) LR competition makes WE larger than in
the SR, i.e.: LWESR < LMES < LWELR
b) trigger prices react distinctively in LR and
SR, i.e.:
((∂pWESR)/(∂L))>0
((∂pWELR)/(∂L))<0.
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SUM UP
The myopic WE enters with a size lower
than LMES
The farsighted (rationality: anticipating
effects of LR entry) WE adopts a size >
LMES.
WE SR and LR triggers react in opposite
ways to dimension.
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With free entry firms exercise their option
sooner since the potential entry of rivals
reduces the value of waiting.
In LR the WE chooses size equating the
value marginal product to w as PMF.
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A LR coincidence between WE and PMF
emerges.
The coincident entry of WE and PMF facing
after entry labour rigidities explains
persistence of WE in industries where
human capital specificities make labour
flexibility costly.
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