Co-Determinatin and Efficiency

We present a new model of employee involvement with incomplete contracts and uncertain monitoring. Distributional considerations limit productivity and generate excessive monitoring under employee control, so co-determination can increase both efficiency and labour's share of the enterprise surplus. Our simple model suggests parity co-determination is optimal. We test the 1976 co-determination law with a panel of West German firm data. Although our samples contain severe recessions when labour hoarding costs of co-determination are highest, and are too short to capture the long run benefits, we find none of the adverse efficiency effects of co-determination or parity change claimed by critics.