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The Horizon Problem Reconsidered

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  • Olesen, Henrik Ballebye
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    Abstract

    This paper challenges the general view in the literature that cooperatives underinvest, because some members will exit the cooperative before the full benefits from their investments are harvested (the horizon problem). This paper demonstrates that full equity redemption will solve the horizon problem. The majority of members will, however, bias the exit payment to their own advantage. This will lead to overinvestment. Thus, the main finding in this paper is that if there is a horizon problem, it will lead to overinvestment – not underinvestment.

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    File URL: http://purl.umn.edu/24489
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    Bibliographic Info

    Paper provided by European Association of Agricultural Economists in its series 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark with number 24489.

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    Date of creation: 2005
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    Handle: RePEc:ags:eaae05:24489

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    Related research

    Keywords: cooperatives; investment incentives; financial structure; Agribusiness; D23; J54; P13;

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    1. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
    2. Porter, Philip K & Scully, Gerald W, 1987. "Economic Efficiency in Cooperatives," Journal of Law and Economics, University of Chicago Press, vol. 30(2), pages 489-512, October.
    3. Borgen, Svein Ole, 2004. "Rethinking incentive problems in cooperative organizations," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 33(4), pages 383-393, September.
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