The Distribution of Wealth and the Assignment of Control Rights in the Firm

We explore the relationship between wealth and the assignment of control rights in the rm by modeling two distinct ways of governing team production: conventional and employee-run. Our approach is novel in assuming that both labor and credit markets are subject to agency problems based on asymmetric information: employees have more accurate knowledge of their level of work e ort than employers, and borrowers have more accurate knowledge of the value of the projects they undertake than do the lenders who nance these projects. We argue that the conventional rm generally has a comparative advantage in handling agency problems regarding lending and borrowing, whereas the employee-run rm's advantage generally lies in handling agency problems regarding the intensity and quality of work. We show that where both types of rms coexist, the equilibrium fraction of workers in employee-run rms and the distribution of wealth are mutually determining. One implication is that e ciency considerations alone are insu cient to explain the assignment of control rights in rms, since an exogenous increase in worker wealth supports a higher fraction of workers in employee-run rms. We are indebted to Duncan Foley, George Martin, Paul Malherbe, Ignacio Ortu~ noOrtin, Fabio Petri, Bob Rowthorn, and Winfried Vogt for helpful comments, and to the MacArthur Foundation for nancial support.