Works Councils: An Agency Perspective∗

Employees’ representatives at workplace (i.e. Works Councils) are an important component of industrial relations, in particular, in Europe. This institution has been considered as efficient mechanism to avoid the lack of communication between manager and employees [Freeman and Lazear (1995)]. However, we investigate the agency problems between workers and their representatives that are supposed to monitor but may collude with management. Workers can incentivize their representatives through elections. We show that in order to commit to report the truth, worker representatives must have high wages that those for employees. Second, the election process (industrial democracy) can generate an incentive of worker representation to misrepresent their information with wrong consequences for workforce and firm. JEL Classification: J30, J53