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This study examines whether parity codetermination at German supervisory boards improves labor investment efficiency at firm level. We focus on labor, as it is an important production factor. Labor investment decisions are not easily reversible in the short term, given that hiring and firing costs are usually quite high due to labor regulation in Germany. As labor representatives are legally entitled to 50% voting rights at the supervisory board level (parity codetermination), we expect them to contribute insider knowledge to the supervisory board. As they have access to internal documents, we also expect them to reduce information asymmetry and potential agency conflicts between management on the one hand and outsiders such as investors or capital suppliers on the other. Both smaller information asymmetries and reduced agency conflicts, in turn, ought to increase a firm’s labor investment efficiency. Labor investment proxies for deviations from a firm’s optimal level of investment in labor in the form of over- and underinvestment, defined as hiring fewer employees than required to run profitable projects (underhiring) or retaining employees who are occupied with non-profitable projects (overhiring). We measure labor investment efficiency using such a net hiring optimum for a sample of German listed firms between 1995 and 2015. The results indicate that parity codetermination causes a lower deviation from the net hiring optimum. Our results are interesting for various stakeholders, especially for policymakers, managers, shareholders and employees who may not be aware of the importance of codetermination for firm efficiency, as well as for firms that are considering circumventing German legislation. Refereed/Peer-reviewed

Ce Working Paper fait l'objet d'une publication in Journal of Monetary Economics, Elsevier 〈https://www.sciencedirect.com/science/article/abs/pii/S0304393218305294〉〈hal-01995026〉; Intra-firm bargaining between a multiple-worker firm and an individual employee leads to overhiring. Taking advantage of the decreasing returns to scale in employment, the firm can reduce the marginal product by hiring an additional worker, thereby reducing the bargaining wage paid to all existing employees. We show that this externality is amplified when firms can adjust hours per worker as well as employment. Hours are too low at the steady state. This misallocation of labor leads to sizeable welfare losses. Our finding is important for economies in which hours adjustment play an important role as it does in many Euro Area countries.

We contribute to the growing literature which aims to link product market regulation and competition to labor market outcomes, in an attempt to explain the divergent US and continental European labor market performance over the past two decades. The main contributions of this paper are threefold. First, we show that the choice of bargaining regime is crucial for the effect of product market competition on unemployment rates, being substantial under collective bargaining and considerably more modest under individual bargaining. Since the choice of bargaining institution is so important, we endogenize it. We find that the bargaining regime which emerges endogenously depends crucially on the degree of product market competition. When product market competition is low, collective bargaining is stable, while individual bargaining emerges as the stable institution under high degrees of product market competition. This also allows us to link product market competition and collective bargaining coverage rates. Our results suggest that the strong decline in collective bargaining coverage and unionization in the US and UK over the last two decades might have been a direct consequence of the Reagan/Thatcher product market reforms of the early 80's. Finally, we calibrate the model to assess the quantitative magnitude of our results. We find that moving from the US low regulation-individual bargaining economy to the EU high regulation-collective bargaining economy leads to a substantial increase in equilibrium unemployment rates from 5.5% to 8.9 % in the model economy.