Research

I examine a model of corporate behavior under shared governance, or co-determination, in the form of employee-elected representatives on a firm’s board of directors. Employee and shareholder representatives engage in sequential bargaining over the firm’s labor, capital, production, and financing decisions. If the firm has market power and as long as employee representatives (e.g., a union) have an interest in increasing labor, a limited increase in employee representation on the board will result in an increase in labor and output, an ambiguous and small effect on capital expenditures, and a decrease in monopoly deadweight loss with no effect on wages, which is in line with previous empirical estimates of the effect of co-determination. In the presence of risk of costly default and tax advantages of debt, limited employee control can reduce socially inefficient reliance on debt over equity. However, if employees elect most or all of the board representatives, then the firm will instead choose to increase wages and may not be able to commit to repay equity, increasing the proportion of debt in its capital structure.

If economic power and political power reinforce each other, wealth and income inequality may create significant distortions in markets and political systems. One particular concern is the possible emergence of what Zingales (2017) calls a Medici vicious circle, “in which money is used to gain political power and political power is then used to make more money”.

In this paper I investigate this hypothesis using a dynamic model of political economy in which a policymaker can redistribute wealth and affect the identity of future policymakers. I show that individual incentives for wealth accumulation can lead to the instability of “democratic” (i.e., median voter optimal) outcomes and generate high levels of wealth inequality even if it reduces welfare.

I develop a novel probabilistic approach to the definition of power and the analysis of its accumulation: political power in the model is defined as the likelihood of one’s optimal policy being implemented. The framework’s flexibility allows me to compare a wide range of political institutions in terms of short and long run wealth and power inequality dynamics. In particular, the presence of democratic procedures can greatly reduce the accumulation of power and result in a more equal wealth distribution. To my knowledge this is the first paper to adopt such an approach to political power and I believe it can be used in future research to analyze concepts beyond wealth and inequality.

I also show that the cost of power acquisition (i.e., the ability to influence future policy) can have a non-monotonic impact on welfare and inequality. A low cost of power acquisition results in high long run inequality as policymakers redistribute both wealth and power in favor of themselves. However, increasing the cost of power acquisition beyond a certain threshold can also lead to higher long run inequality, as it limits the persistence of all policies, including those that are socially optimal.

Contracts between firms backed by venture capital and their investors are often much more complicated and diverse than a public firm’s equity or debt issuance. Although a substantial number of firms use similar contracts throughout their lifetime, some choose to give additional privileges to select investors. Using a dataset of 1783 rounds of financing of 313 firms, I show that avoidance of “down rounds” (i.e., drops in issue price of newest shares) is a crucial factor in this decision, increasing the probability of a firm giving an investor more rights by over 20%.