Cooperatives vs. outside ownership
AbstractWe are concerned with the design of a constitution for a firm - an ex ante contract which assigns residual rights of control (and possibly residual income rights) without reference to the issue to be decided. We focus attention on two polar constitutions: non-profit cooperatives and outside ownership. In the former, ownership is shared among a group of consumers on a one member, one vote basis. In the latter, all control rights and rights to residual income are allocated to an outsider. Ex post, agents are assumed to have asymmetric information, which rules out recontracting. We have two main results. First, in the case of perfect competition, an outside owner achieves the first-best; a cooperative typically does not, because the rent from any cost advantage relative to the market is used to shield members from competitive pressure, and the median voter's preferences may not reflect average preferences. Second, in the case where the members of a cooperative have common preference orderings they unanimously vote for the first-best; an outsider owner typically makes inefficient decisions, tailored to the marginal rather than to the average consumer.
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Bibliographic InfoPaper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 19360.
Length: 54 pages
Date of creation: Jan 1998
Date of revision:
Cooperatives; firms; ownership; property right.;
Find related papers by JEL classification:
- D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
- L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
- P13 - Economic Systems - - Capitalist Systems - - - Cooperative Enterprises
- P12 - Economic Systems - - Capitalist Systems - - - Capitalist Enterprises
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