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Introduction

Are Workers' Enterprises entry policies conventional? Gianpaolo Rossini University of Bologna Michele Moretto University of Padova ASSET Annual Conference, Padova 1-3 November 2007. Introduction.

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Introduction

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  1. Are Workers' Enterprises entry policies conventional?Gianpaolo RossiniUniversity of BolognaMichele MorettoUniversity of PadovaASSETAnnual Conference, Padova 1-3 November 2007

  2. 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

  3. 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.

  4. 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.

  5. LR: LMFs, WEs and PMF are indistinguishable. LR comparison between PMF and WE confined to static framework -> entry not modeled.

  6. 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.

  7. 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).

  8. 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.

  9. 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.

  10. 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.

  11. WE's entry under uncertainty Assumptions • entry sunk cost • Entry can be delayed • 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

  12. 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.

  13. 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.

  14. 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).

  15. 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.

  16. 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.

  17. 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.

  18. 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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