The Political Economy of Corporate Governance

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Abstract
The paper analyzes the political decision that determines the degree of investor protection. We show that, in some circumstances, entrepreneurs and workers agree to trade low investor protection for high employment protection. The feasibility of this "corporatist" agreement depends on the distribution of wealth and on technological factors. Otherwise, a "non-corporatist" outcome will occur, featuring high investor protection and low employment protection. Therefore, our main prediction is that employment and investor protection is negatively correlated across countries. The model also predicts that the frequency of mergers and acquisitions is negatively correlated with employment protection. Both predictions are consistent with OECD evidence.

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