The dominant agency-cost paradigm for the analysis of corporate law is based on the
proposition that the welfare of society is best met by rules which minimise the costs of production through the corporate form. This is typically interpreted to mean that the agency costs of shareholders should be minimised, so as to reduce the company?s cost of capital.
However, it is clear that the agency cost analysis admits of the theoretical possibility that a company?s overall costs of production might be minimised even in the presence of sub-optimal rules relating to the cost of capital if those additional capital costs were outweighed by a greater reduction in the costs of contracting for other inputs necessary for the company?s productive activities.
It has often been asserted that this situation obtains in relation to labour inputs. This
essay seeks to establish the basis on which this argument might be formulated, dealing in particular with the proposition that employees can obtain full protection for their exchange relationship through contracting with the company. It then considers what empirical evidence is available about the production costs of companies in systems with high levels of mandatory employee involvement in decision-making. It focuses in particular on the tripartite system of employee representation in Germany ? board representation, works councils and collective bargaining. Finally, it speculates about the conditions under which high levels of employee involvement might reduce a company?s overall costs of production or, by contrast, might increase those costs.