Review of Industrial Organization 18: 201–218, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
Allocating Control over Firms: Stock Markets
versus Membership Markets
GREGORY K. DOW
Department of Economics, Simon Fraser University, Burnaby, British Columbia V5A 1S6, Canada
Abstract. The theory of the ﬁrm must explain how decision-making powers are allocated between
suppliers of capital and labor. Most large enterprises award formal control to investors rather than
workers. I suggest here that this asymmetry can be traced in part to differences between stock
markets and membership markets as institutional mechanisms for allocating control over ﬁrms. The
attractive theoretical properties of membership markets are examined, along with some factors that
may account for their rarity in practice. These practical difﬁculties help explain the rarity of labor-
managed ﬁrms themselves, along with various facts about their design, behavior, and distribution
Key words: Control rights, stock markets, labor-managed ﬁrms.
Debates surrounding the control of ﬁrms have often been complex, protracted,
and loud. In particular, reformers of various stripes have called for more worker
participation in the management of ﬁrms. Here I review what economic theory has
to say about worker control and consider explanations for its relative rarity as a
mode of economic organization.
A consensus has emerged in the new institutional economics that the ﬁrm should
be seen as a set of incomplete contracts among input suppliers (Williamson, 1985;
Grossman and Hart, 1986). It follows that the right to make decisions not pre-
viously determined by contracts is fundamental to the concept of the ﬁrm itself.
These control rights could involve a variety of issues: product line, investment
strategies, wages and employment, production methods, and working conditions,
for example. A naive economics student might expect the discipline to have de-
veloped a cogent explanation for the conventional assignment of control rights to
An early version of this paper was presented at the NBER conference on “Shared Capitalism”
in Washington, D.C. on May 22–23, 1998. Valuable ﬁnancial support was provided by the MacAr-
thur Foundation, the Brookings Institution, the Social Sciences and Humanities Research Council
of Canada, and the Swedish Collegium for Advanced Study in the Social Sciences. The author is
indebted to Louis Putterman, Gil Skillman, and David Ellerman for helpful discussions, but bears
sole responsibility for all opinions expressed.