New York, NY—Companies almost always make investment choices to maximize profits, but these decisions often have negative consequences for workers and other stakeholders who have no control. The current economic climate exposes these impacts on workers: heavy inflation, massive layoffs, and overall a large and growing gap between the rich and poor. A new paper from Columbia Business School, however, finds that companies can offset 60% of the negative impact related to their investment-related decision by compensating workers in exchange for complete control over investment decisions. Columbia Business School Professor John Donaldson proposes that through private arrangements between stockholders and workers – using more holistic and generous hiring and wage negotiations – stockholders can voluntarily compensate workers in exchange for keeping full control of the company’s investment plan.

The research, The Macroeconomics of Stakeholder Equilibria, by Professor Donaldson, the Mario J. Gabelli Professor of Finance, and his co-author Professor Hyung Seok E. Kim at the Korea Advanced Institute of Science and Technology, proposes a “Coasian solution,” where companies take a more comprehensive and fair approach to negotiating wages and hiring workers. According to the authors, the current focus of companies is primarily on financial gains for shareholders. The researchers propose a solution to a more inclusive society that considers the long-term benefits and well-being of both the workers and owners of a company. More specifically, they propose wage negotiations should take into account different factors that affect workers’ employment, different levels of risk that workers face compared to stockholders such as job loss, and differences in skills or experience. This includes offering a “lifetime contract” that only the worker can end, with above-market wages that are stable over time.  Overall, this means workers would have more rights and bargaining power when negotiating employment terms but less power when it comes to affecting future investment plans. These arrangements can resolve 60% of the investment-related impact on workers’ wages, a number that took the U.S. more than four decades to previously achieve. In other words, workers are proactively compensated for any unfavorable stockholder decisions through this unique wage model.

“As we work to reduce the wealth inequality gap created by stockholders and their value-maximizing investment decisions, our model should be considered as a way to break down this gap,” says Professor Donaldson. “Our simple idea solves the issue by promising more wage stability to workers while simultaneously benefitting stockholders, all without any government intervention needed.”

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About the Researcher

Columbia Business School

John Donaldson

Mario J. Gabelli Professor of Finance
Economics Division