TY - JOUR AU - Blasi, Joseph R AU - Kruse, Douglas L AU - Markowitz, Harry M TI - Risk and Lack of Diversification under Employee Ownership and Shared Capitalism JF - National Bureau of Economic Research Working Paper Series VL - No. 14229 PY - 2008 Y2 - August 2008 DO - 10.3386/w14229 UR - http://www.nber.org/papers/w14229 L1 - http://www.nber.org/papers/w14229.pdf N1 - Author contact info: Joseph R. Blasi Rutgers University School of Management and Labor Relations 200 B Levin Building Rockefeller Road New Brunswick, NJ 08903 Tel: 732/445-5444 Fax: 732/445-2830 E-Mail: blasi@smlr.rutgers.edu Douglas L. Kruse School of Management and Labor Relations Rutgers University 94 Rockafeller Road Piscataway, NJ 08854 Tel: 732/445-5991 Fax: 732/445-2830 E-Mail: kruse@smlr.rutgers.edu Harry M. Markowitz Rady School of Management, Otterson Hall, Room 4S1 9500 Gilman Dr. #0553 La Jolla, CA 92093-0553 E-Mail: hmarkowitz@ucsd.edu M1 - published as Joseph R. Blasi, Douglas L. Kruse, Harry M. Markowitz. "Risk and Lack of Diversification under Employee Ownership and Shared Capitalism," in Douglas L. Kruse, Richard B. Freeman and Joseph R. Blasi, editors, "Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options " University of Chicago Press (2010) M3 - presented at "Shared Capitalism Conference", October 6-7, 2006 AB - Some analysts view risk as the Achilles Heel of employee ownership and to some extent variable pay plans such as profit sharing and gainsharing. Workers in such "shared capitalist" firms may invest too much of their wealth in the firm, contrary to the principle of diversification. This paper addresses whether the risk in shared capitalism makes it unwise for most workers or whether the risk can be managed to limit much of the loss of utility from holding the extra risk. We create an index of financial security based on worker pay and wealth, and find that workers who feel financially insecure exhibit fewer of the positive outcomes associated with shared capitalism, and are less interested than other workers in receiving more employee ownership or even more profit sharing in their workplaces. This response is substantially lessened, however, when accounting for worker empowerment, good employee relations, and high-performance work bundles that appear to buffer worker response toward risk and increase interest in shared capitalism plans. We also discuss portfolio theory which suggests that any risky investment -- including stock in one's company -- can be part of an efficient portfolio as long as the overall portfolio is properly diversified. We show that given estimates of risk aversion parameters, workers could prudently hold reasonable proportions of their assets in employee stock ownership of their firm with only a modest loss in utility due to risk. A good strategy for firms is to personalize individual portfolios on the basis of worker characteristics and preferences, developing investment strategies that would diversify each worker's entire portfolio in ways consistent with individual risk preferences. ER -