Rent Seeking, Employment Security, and Works Councils: Theory and Evidence for Germany

Schmalenbach Business Review, Vol. 62, pp. 2-40, January 2010

39 Pages Posted: 21 Feb 2010

See all articles by Michael Beckmann

Michael Beckmann

University of Freiburg - Personnel and Organizational Economics

Matthias Kräkel

University of Bonn - Economic Science Area; Institute for the Study of Labor (IZA)

Silvia Föhr

University of Leipzig

Date Written: January 1, 2010

Abstract

We highlight two effects of a works council that seem contradictory: the rent-seeking effect, which claims that a works council is set up by the workers to extract large rents from their employer, and the employment-security effect, which asserts that a works council is founded if the firm is financially stressed and workers are afraid of being dismissed. Since firms realize large rents only in good financial situations, there is a strict trade-off between both effects. We derive both the rent-seeking and the employment security effects theoretically, then test our theoretical approach with German firm-level data. Our econometric analysis clearly supports the rent-seeking effect, but not the employment-security effect.

Keywords: Employment Security, Foundation of a Works Council, Rent Seeking

JEL Classification: C23, J53, M50

Suggested Citation

Beckmann, Michael and Kräkel, Matthias and Föhr, Silvia, Rent Seeking, Employment Security, and Works Councils: Theory and Evidence for Germany (January 1, 2010). Schmalenbach Business Review, Vol. 62, pp. 2-40, January 2010, Available at SSRN: https://ssrn.com/abstract=1556750

Michael Beckmann (Contact Author)

University of Freiburg - Personnel and Organizational Economics ( email )

Platz der Alten Synagoge
D-79085 Freiburg
Germany
++49 761 203-2392 (Phone)
++49 761 203-2394 (Fax)

Matthias Kräkel

University of Bonn - Economic Science Area ( email )

Adenauerallee 24-42
BWLII
D-53113 Bonn
Germany
+49 228 73 92 11 (Phone)
+49 228 73 92 10 (Fax)

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Silvia Föhr

University of Leipzig ( email )

Marschnerstrasse 31
D-04109 Leipzig, 04109
Germany