Co-evolution of politics and corporate governance

In the OECD countries, there exists a negative cross-country correlation between an economy's degree of employment protection and its degree of corporate ownership dispersion. One explanation is that employees’ political rights influence corporate governance: systems characterized by strong employees’ rights tend to be balanced by strong and concentrated owners. In this approach, the separation between ownership and control is only possible when unions and social democratic parties are sufficiently weak. In this paper we argue that causation runs also in the opposite direction (from strong concentrated ownership to strong employees’ protection) and leads to multiple equilibria characterized by alternative co-evolution paths of politics and corporate governance. To empirically assess our theoretical arguments we estimate a simultaneous equation model for workers rights’ protection and corporate ownership structure determination by three-stage least squares in a sample of 21 OECD countries. We conclude by arguing that the relative relevance of each flow of causation has important economic policy implications.