Incentives and Voluntary Investment in Employer Shares

Issouf Soumaré

Economic Notes, 2013, vol. 42, issue 1, 1-17

Abstract: type="main" xml:lang="en">

Using a partial equilibrium model, this paper makes a first attempt to provide an explanation based on rational behaviour for the basic big puzzle of why workers have large holdings of the shares of their employer in their defined contribution (DC) pension plans. The primary explanations in the literature seem to be behavioural ones that involve sub-optimal behaviour. This paper attempts to see how far a standard optimizing setting in a principal–agent type framework can go in explaining the same phenomenon. It uses an incentive approach involving two agents, senior managers and workers to show how portfolio weights can be voluntarily shifted away from what would be first best in the absence of an incentive problem.

Date: 2013
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