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Why Do Group Incentives Work? Employee Ownership and Specific Human Capital Investment1 Chong-En Bai School of Economics and Finance, University of

By Chenggang Xu


This paper studies the effect of employee ownership, a group incentive device, on workers’ individual incentives for investing in Þrm-speciÞc human capital. Under certain conditions, we show that the workers ’ investment and expected income increase, and the Þrm monitoring intensity decreases, with employee ownership. Employee ownership increases the workers ’ expected income because it improves separation efficiency, not because it gives the workers ownership for free. We also show that the incentive effect of employee ownership increases as a worker’s reservation wage decreases or as the monitoring cost increases. Most of our results are consistent with the available empirical evidence

Topics: Group Incentives, Employee Ownership, SpeciÞc Human Capital
Year: 2001
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