Wage-setting institutions and corporate governance

•Corporate governance differs across countries.•Wage-setting institutions are a possible contributor.•Investor protection is related to wage-bargaining centralization.•This relationship is nonmonotonic.•The model can explain a puzzle involving Scandinavian countries.

We present a model in which wage-setting structures explain cross-country variation in corporate governance. The model predicts a nonmonotonic relationship between the level of centralization in wage-bargaining institutions and the levels of firm ownership concentration and investor protection legislation. Low and high degrees of centralization yield less concentrated ownership and more investor protection than intermediate degrees. Like recent research, this paper highlights labor as a key constituent in shaping corporate governance. However, our theory can resolve an important puzzle this research confronts, namely, why Scandinavian countries with higher than average labor strength also have higher than average investor protection legislation.

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