Fairness, Inequality, and Corporate Governance Thomas Christiano Martijn K.J. Cremers Saura Masconale Simone M. Sepe Shaping The Corporate Landscape Symposium June 14, 2016

Background Conditions for Fairness in Individual Exchange The Principle of Global Equal Capacity  Equal Cognitive Condition  equal access to information  Equality of Opportunity for Exit or Refusal of Entry  proportionality principle

Principle of Proportionality Power over the making of the content of the transaction ought to be apportioned to one’s stake in the transaction. The person who has greater legitimate interests in play ought to have more say in the making of the agreement. Stakes determined based on the significance of the non-agreement point

Arguments Intuitive Argument  reasonable to assume that those who have more at stake will care more Welfare Argument  those who have more at stake have better incentives for effort Egalitarian Argument  equalize the say of people over the matters of their interest

Fundamental Puzzle of Free Transactions Person with smaller stake but better able to afford no agreement Person with More Bargaining Power

Imperfect Markets (and Government) The problem of fairness may not arise in the context of complete markets as each market participant would be able to fully insure her interest Similarly, the problem of fairness may not arise in the context of perfect public enforcement

Corporate Form in Incomplete Markets Classic corporate features are redundant in complete markets:  Lock-in capital – needed to avoid consumption shocks  Transferable shares – way out for consumption shocks when capital is locked in  Limited liability – response to contractual incompleteness  Centralized management – response to indeterminacy of profit maximization function

Fairness in Corporate Governance: A Consequentialist Approach Prices are only partially informative in incomplete markets Hold-up in incomplete markets  capital is more mobile and easier to redeploy than labor  result is suboptimal investment by labor Fairness as insurance and value-increasing production input

Demystifying the Neoclassicals “Strenghts” “Concerns” Union Relations Employee Health & Safety Supply Chain Child Labor Labor-Management Relations Union Relations Cash Profit Sharing Employee Involvement Employee Health & Safety Supply Chain Labor Standard Compensation & Benefit Employee Relations Professional Development Human Capital Management Welfare Employee Index:

Profitability and Employee Welfare Dep. Variable: Profitability [t] Variables (1)(2) Employee Welfare Index [t-1] *** *** (8.36)(3.08) Fixed EffectsSIC + YearFirm + Year N24,24124,337 Adjusted R-Squared

Firm Value, Staggered Boards, and Labor Dep. Variable: Firm Value [t] Variables(1)(2) Staggered Board [t-1] ** (2.07)(-0.91) Staggered Board [t-1] *** * Labor Productivity (3.74) Labor Productivity *** (-8.31) Fixed Effects Firm+Year N30,79724,880 Adjusted R-Squared

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