This paper presents a positive model which derives the preferences of entrepreneurs,
workers, and investors concerning investor and employment protection. It shows that
institutional setups on capital and labor markets might be intertwined by politicoeconomic
forces. Multiple politicoeconomic equilibria arise from our model. Some countries
especially in continental Europe exhibit a corporatist politicoeconomic equilibrium
with a substantial protection of insiders on both, capital and labor markets. The
more important money is in political decision-making, the more divided the workforce
is, and the more globalized capital markets are, the more likely is a capitalist
politicoeconomic equilibrium with little employment and substantial investor protection.
Our prediction of a negative crosscountry relationship between different measures
of labor market rigidities and of competition on capital markets receives considerable
empirical support, thus being potentially important for the current debate concerning
structural reforms of labor markets and of corporate governance systems.