Re: Yes, the Earth is Round

["Charles W. Upton" <cupton@kent.edu>]

Actually the earth is pear shaped. 

 Ellerman makes several good points, the key one being that economic theory
is being ignored and mischaracterized in this debate.  Several points are
worth making:

1.  Optimal portfolio theory requires diversification.  An individual
thinking of how to hold his or her accumulated financial wealth would
generally be well advised to avoid holding shares in his own company.  The
covariance between his or her human capital, both firm specific and non
firm specific is just too high.  

2.  The reason to hold capital in the firm for which you work must
therefore be found in incentives and minimizing monitoring costs.  When you
own the firm, you may be underdiversified, but at least you are playing
with your own money, which certainly focuses the mind.

3.  At the same time, monitoring costs will lead to different structures
for different employees in a firm and for different industries.  It may
make sense for a dentist to own the practice, rather than work for a dental
conglomerate, say, but does it make sense to cut the hygenists in for a
piece of the action?  And, why is the structure which is right for one
industry right for all industries?  Clearly it isn't.

4.  Remember, the Soviet system was, in theory, 100% ESOP'ed (with
apologies for killing the English Language).  And we know what a paradygm
of economic efficiency that was.  

5.  Finally, Ellerman is quite right.  Taxes drive a lot of activity, and
the tax subsidy to ESOP's explains a lot of the action.


Charles W. Upton
2324 Exline Circle
Hudson OH 44236

Department of Economics
Kent State University
http://www.personal.kent.edu/~cupton