Is Employee Ownership so Senseless?

Since Enron and the ruin of thousands of its employees, employee ownership is harshly criticized. Investing savings in employer’s stock would be equivalent to bet on only one asset. Moreover, employee ownership’s debated efficiency would not justify employers to grant company stock to their employees. Still, employee ownership is put in place by thousands of companies and withhold by millions of employees throughout the world. This paper considers a moral hazard setting where a risk neutral entrepreneur grants company stock to its risk averse employee as an incentive. We show that there is an optimal transfer of employee ownership that satisfies employee’s risk preference and has an incentive effect. We thus bring about rational argument in favor of employee ownership