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Cooperatives vs. outside ownership

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  • Oliver Hart
  • John Moore
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    Abstract

    We 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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    File URL: http://eprints.lse.ac.uk/19360/
    File Function: Open access version.
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    Bibliographic Info

    Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 19360.

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    Length: 54 pages
    Date of creation: Jan 1998
    Date of revision:
    Handle: RePEc:ehl:lserod:19360

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    Web page: http://www.lse.ac.uk/
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    Related research

    Keywords: Cooperatives; firms; ownership; property right.;

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    Cited by:
    1. Ramon Casadesus-Masanell & Tarun Khanna, 2003. "Globalization and Trust: Theory and Evidence from Cooperatives," William Davidson Institute Working Papers Series wp592, William Davidson Institute at the University of Michigan.
    2. Chong-En Bai & Cheng-Gang Xu, 2001. "Ownership, incentives and monitoring," LSE Research Online Documents on Economics 3750, London School of Economics and Political Science, LSE Library.
    3. Mihir A. Desai & C. Fritz Foley & James R. Hines Jr., 2002. "International Joint Ventures and the Boundaries of the Firm," NBER Working Papers 9115, National Bureau of Economic Research, Inc.
    4. Roberts, John & Van den Steen, Eric, 2000. "Shareholder Interests, Human Capital Investment and Corporate Governance," Research Papers 1631, Stanford University, Graduate School of Business.
    5. William R. Emmons & Frank A. Schmid, 2001. "Membership structure, competition, and occupational credit union deposit rates," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 41-50.
    6. William R. Emmons & Frank A. Schmid, 2004. "When for-profits and not-for-profits compete: theory and empirical evidence from retail banking," Working Papers 2004-004, Federal Reserve Bank of St. Louis.
    7. William R. Emmons & Frank A. Schmid, 1999. "Wages and risk-taking in occupational credit unions: theory and evidence," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 13-32.
    8. Claudio Balestri, 2014. "The Other Side of Ownership in Nonprofit Organizations: an Economic Rationale for Democracy," Public Organization Review, Springer, vol. 14(2), pages 187-199, June.

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