Employee Ownership and Entrenchment Strategies

We study entrenchment in a signaling model of employee ownership. A manager, privately informed about their type, offers their employee a stake in the firm; the employee infers the manager’s type from this offer and chooses their effort. A good manager finds it harder than a bad one to induce maximal effort, while both types rank contracts alike, which works against separation. When the dismissal threshold does not bind, the unique pure strategy equilibrium surviving a refinement of deviations is pooling. When it binds, a low-performing manager who keeps their position with positive probability grants more stock than under complete information only in equilibria in which the employee randomizes, and they are then exactly indifferent to doing so: over-granting appears, but it yields them nothing relative to the cheapest contract they offer, and it never reaches the level that entrenchment would require. In that regime, the cost of asymmetric information falls entirely on the low-performing manager, who may be expelled even when retaining them would make no party worse off and some strictly better off. With continuous effort, over-granting arises in every specification we compute, but it is unrelated to the threat of dismissal.