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Why are Worker Cooperatives So Rare?

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  • Michael Kremer

Abstract

This paper argues that worker cooperatives are prone to redistribution among members, and that this redistribution distorts incentives. I assume that employment contracts are incomplete. In the model cooperative members pay in a capital contribution to purchase equipment. They then receive shocks to ability. Each worker's (observable) output depends on ability and on effort, neither of which can be observed separately. After ability is realized, members vote on a wage schedule as a function of output. If the median member has less than average ability, the cooperative will vote for a redistributive schedule, dulling incentives. Whereas workers in firms owned by outside shareholders would quit if the firm redistributed away from them, cooperative members will be reluctant to leave, since this entails forfeiting the dividends on their capital contribution. The model can explain why cooperatives typically have egalitarian wage policies.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6118.

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Date of creation: Jul 1997
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Handle: RePEc:nbr:nberwo:6118

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  1. Craig, Ben & Pencavel, John, 1992. "The Behavior of Worker Cooperatives: The Plywood Companies of the Pacific Northwest," American Economic Review, American Economic Association, vol. 82(5), pages 1083-105, December.
  2. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, vol. 8(3), pages 329-340, December.
  3. Oliver Hart & John Moore, 1998. "Cooperatives vs. Outside Ownership," NBER Working Papers 6421, National Bureau of Economic Research, Inc.
  4. Benham, Lee & Keefer, Philip, 1991. "Voting in Firms: The Role of Agenda Control, Size and Voter Homogeneity," Economic Inquiry, Western Economic Association International, vol. 29(4), pages 706-19, October.
  5. Legros, Patrick & Newman, Andrew F., 1996. "Wealth Effects, Distribution, and the Theory of Organization," Journal of Economic Theory, Elsevier, vol. 70(2), pages 312-341, August.
  6. Kevin Lang & Peter-John Gordon, 1995. "Partnerships as Insurance Devices: Theory and Evidence," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 614-629, Winter.
  7. Bonin, John P & Jones, Derek C & Putterman, Louis, 1993. "Theoretical and Empirical Studies of Producer Cooperatives: Will Ever the Twain Meet?," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1290-320, September.
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