OPTIMAL EMPLOYEE OWNERSHIP CONTRACTS UNDER AMBIGUITY AVERSION

The aim of this paper is to compute and describe the conditions of an optimal employee ownership contract between an employer and an ambiguity‐averse employee. We then introduce ambiguity aversion in the baseline model of Aubert et al. (2014) using the multiple prior preferences of Gilboa and Schmei...

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Bibliographic Details
Published inEconomic inquiry Vol. 56; no. 1; pp. 238 - 251
Main Authors Aubert, Nicolas, Ben Ameur, Hachmi, Garnotel, Guillaume, Prigent, Jean‐Luc
Format Journal Article
LanguageEnglish
Published Boston, USA Wiley Periodicals, Inc 01.01.2018
Blackwell Publishers Ltd
Western Economic Association
Wiley
Subjects
Ambiguity
Behavioral economics
Cognitive biases
Economic models
Economics and Finance
Employee ownership
Employers
Game theory
Humanities and Social Sciences
France
Ambiguity aversion
Corporate governance G34
Shared capitalism
Behavioral finance
Employee ownership
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Summary:The aim of this paper is to compute and describe the conditions of an optimal employee ownership contract between an employer and an ambiguity‐averse employee. We then introduce ambiguity aversion in the baseline model of Aubert et al. (2014) using the multiple prior preferences of Gilboa and Schmeidler (1989) and its extension proposed by Maccheroni et al. (2006). This model offers solutions that reconcile labor and financial economics and behavioral economics research findings on employee ownership. The paper focuses on the most common situation where employee ownership has a positive impact on corporate performance, but can also be used as an entrenchment mechanism. We determine the optimal company stock contribution, which corresponds to a perfect subgame Nash equilibrium in the ambiguity framework. Using the framework of Gilboa and Schmeidler (1989), we show that the optimal ownership contract is increasing with respect to the lower bound of the return expectation in the case of a high level of effort, and decreasing with respect to the upper bound of the return expectation in the case of a low level of effort. In the framework of Maccheroni et al. (2006), we prove that if aversion to ambiguity is sufficiently high, then we find the same behavior as in the case of no ambiguity. (JEL G11, G32, G34, J33)
ISSN:0095-2583
1465-7295
DOI:10.1111/ecin.12478