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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Co-Determination, Efficiency, and Productivity Felix R. FitzRoy Kornelius Kraft D I S C U S S I O N P A P E R S E R I E S Forschungsinstitut zur Zukunft der ArbeitInstitute for the Study ABSTRACT Co-Determination, Efficiency, and Productivity *We present the first panel estimates of the productivity effects of the unique German institution of parity, board-level co-determination. Although our data span two severe recessions when labour hoarding costs of co-determination are probably highest, and the panel is too short to capture the likely long run benefits in terms of human capital formation and job satisfaction, we find positive productivity effects of the 1976 extension to parity codetermination in large firms. Conference, University of Bristol, the 3 rd DFG-colloquium on industrial economics and input markets, and the University of Essen, particularly Jan Askildsen, Stephen Smith, Murat Sertel and Olaf Hübler for helpful comments and discussion. Two referees provided very useful comments on an earlier version. We are also very grateful to Gregor Brüggelambert and Antonia Niederprüm for excellent research assistance and the Deutsche Forschungsgemeinschaft for financial support.

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Die Discussion Papers dienen einer möglichst schnellen Verbreitung von neueren Forschungsarbeiten des ZEW. Die Beiträge liegen in alleiniger Verantwortung der Autoren und stellen nicht notwendigerweise die Meinung des ZEW dar.Discussion Papers are intended to make results of ZEW research promptly available to other economists in order to encourage discussion and suggestions for revisions. The authors are solely responsible for the contents which do not necessarily represent the opinion of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp0475.pdf Non-technical SummaryIt is generally accepted that technical progress, along with human capital, has a major impact for the wealth and long-term growth of industrialized countries. Since Knight, Schumpeter and the beginning of the discussion on innovation, great emphasis has been placed on the central role of the entrepreneur in this process. It seems to be generally accepted that the market is an entrepreneurial process, a learning process is central to the market, and entrepreneurial activities are creative acts of discovery. In stark contrast to these statements on the entrepreneurs, large firms are led by managers nowadays, which leads to a classical principal-agent problem. It is questionable whether managers always act in the interest of the capital owners. On the one hand, many firms may be owned by people or cooperations that hold a major share of the capital. In this case, one could argue that the managers of those firms are monitored by the shareholders and their major actions and decisions are closely controlled. On the other hand, firms with widely held stock are usually assumed to be insufficiently controlled by the shareholders. Each shareholder faces the well-known free-rider problem, as the benefits of an initiative monitoring the manager by one shareholder aimed at improving the quality of management will be enjoyed by all other shareholders. The consequence will be underinvestment into monitoring the management. It remains to be investigated what consequences this has for the innovation process.First the paper discusses theoretically the incentive mechanisms driving innovation in managerial firms. There are opposing effects at work, and it is a priori unclear which incentive mechanism outweighs the other. On the one hand, managers might be reluctant to invest in innovation activity due to the inherent risk of failure. On the other hand, managers might invest above the profit-maximizing level into R&D activities, as it is a source of firm growth and the managers' salaries usually depend not only on profits but on growth, too. In this line, debt financing is interesting to study. In the case where the positive growth incentive outweighs the risk argument influencing innovation negatively, insufficiently controlled managers might be disciplined by the credit market.We then report the results of an empirical study on the effects of the concentration of capital shares and debt financing on innovative activity....