Works Councils: An Agency Perspective

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.