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This paper investigates the role of works councils in a simple agency framework in which
works councils are supposed to monitor manager's information on behalf of the workforce,
but they are independent agents who might pursue their private interest. First, we consider
that workers can incentivize works councils through contingent monetary payments. In order
to deter collusion, workers must pay higher compensations in states of nature where they can
be expropriated by potential coalitions among works councils and management. Collusion
makes contingent payments costly and reduces workers' payoffs. Second, when elections are
used to align works councils' interest only well compensated representatives would face an
inter-temporal trade-off between accepting management's transfers at first period and losing
rents at the second period. Elections increase the cost of entering on collusive behaviour with
management and works councils will try to behave on the employees' interest.
Juan M. Gallego, Universidad del RosarioDepartment of Economics. Universidad del Rosario and Ld'A -Milan
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