Journal of Economic Behavior and Organization 20 (1993) 319-330. North-Holland Strategic vote manipulation in a simple democracy Nejat Anbarci* St&e Uniwrsity of NEW York ut B@alo, NY, USA Received March 1991, final version received October 1991 In both the Employee Stock Ownership Plan (ESOP) and employee buyouts, the common and crucial phenomenon is that some workers have two sources of income, namely wages and shares of profit. We analyze that phenomenon in an economy where workers are nonunionized and wages are determined by voting. If the employers sell a certain amount of shares of the capital stock to some non-risk-loving workers, these workers vote for the lowest possible wage along with the employers. As a result, all workers become equally worse off because of the competition among workers to buy those shares. 1. Introduction Adler and Kelso (1958) advocated the Employee Stock Ownership Plan (ESOP) strongly in their zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGF The Capitaht Manifesto. As one of the major proponents of the ESOP, Frisch (1982, p. 15), puts it ‘An ESOP is a tax qualified plan designed to transfer stock equity to the hands of employees without requiring any contribution other than labor.” The ESOP is a fairly complicated phenomenon which also deals with corporate law, leveraged buyouts and so on. Its essence, however, is the provision of two sources of income, which is the main issue analyzed in this paper. In 1975, Ronald Reagan commented on ESOP: ‘An ever-increasing number of citizens would have two sources of income ~ a pay check and a share of the profits. Could there be a better answer to the stupidity of Karl Marx than millions of workers individually sharing in the ownership of the means of production.‘2 *Helpful comments and suggestions from Peter Morgan are gratefully acknowledged. ‘In 1976, it was estimated that no more than 300 companies were offering ESOPs [see Marsch and McAllister (1981, p. .553)]. But by 1983, the National Center for Employee Ownership reported that over 6,000 American corporations had adopted these plans (Wall Street Journal, July 16, 1983). Russell (1985) claims that several million employees were covered by ESOPs in that year. ‘Frisch (1982), p. v in the Preface. Also, in the second paragraph of his letter to Governor DuPont of Delaware in 1981, President Reagan states: ‘I have long believed that the widespread distribution of private property ownership is essential to the preservation of individual liberty, to the strength of our competitive free enterprise economy, and to our republican form of government.’ [See Frisch (1982, p. 14l), for the complete text of that letter.] The labor unions’ view of ESOP, on the other hand, has not been unanimously favorable; according to the 0167-268 l/93/$06.00 ,c,> 1993-Elsevier Science Publishers B.V. All rights reserved