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Cooperatives vs. Outside Ownership

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Author Info
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: nonprofit 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 outside owner typically makes inefficient decisions, tailored to the marginal rather than to the average customer.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6421.

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Date of creation: Feb 1998
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Handle: RePEc:nbr:nberwo:6421

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Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

References listed on IDEAS
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  1. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, vol. 8(3), pages 329-340, December. [Downloadable!] (restricted)
  2. Eric Maskin & Jean Tirole, 1997. "Unforseen Contingencies, Property Rights, and Incomplete Contracts," Harvard Institute of Economic Research Working Papers 1796, Harvard - Institute of Economic Research.
  3. Albaek, Svend & Schultz, Christian, 1997. " One Cow, One Vote?," Scandinavian Journal of Economics, Blackwell Publishing, vol. 99(4), pages 597-615, December. [Downloadable!] (restricted)
    Other versions:
  4. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December. [Downloadable!] (restricted)
    Other versions:
  5. Wolfgang Pesendorfer & David Levine, 1992. "When are Agents Negligible?," Discussion Papers 1018, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
    Other versions:
  6. Rob, Rafael, 1989. "Pollution claim settlements under private information," Journal of Economic Theory, Elsevier, vol. 47(2), pages 307-333, April. [Downloadable!] (restricted)
  7. Michael Kremer, 1997. "Why are Worker Cooperatives So Rare?," NBER Working Papers 6118, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Barzel, Yoram & Sass, Tim R, 1990. "The Allocation of Resources by Voting," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 745-71, August. [Downloadable!] (restricted)
  9. Holmstrom, Bengt & Myerson, Roger B, 1983. "Efficient and Durable Decision Rules with Incomplete Information," Econometrica, Econometric Society, vol. 51(6), pages 1799-819, November. [Downloadable!] (restricted)
    Other versions:
  10. 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. [Downloadable!] (restricted)
  11. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn. [Downloadable!] (restricted)
  12. William R. Emmons & Willi Mueller, 1997. "Conflict of interest between borrowers and lenders in credit co- operatives: the case of German co-operative banks," Working Papers 1997-009, Federal Reserve Bank of St. Louis. [Downloadable!]
  13. Hart, Oliver & Moore, John, 1996. "The Governance of Exchanges: Members' Cooperatives versus Outside Ownership," Oxford Review of Economic Policy, Oxford University Press, vol. 12(4), pages 53-69, Winter.
    Other versions:
  14. Makowski, Louis, 1983. "Competition and Unanimity Revisited," American Economic Review, American Economic Association, vol. 73(3), pages 329-39, June.
  15. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
    Other versions:
  16. Mailath, George J & Postlewaite, Andrew, 1990. "Asymmetric Information Bargaining Problems with Many Agents," Review of Economic Studies, Blackwell Publishing, vol. 57(3), pages 351-67, July. [Downloadable!] (restricted)
  17. 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. [Downloadable!] (restricted)
  18. Ostroy, Joseph M., 1980. "The no-surplus condition as a characterization of perfectly competitive equilibrium," Journal of Economic Theory, Elsevier, vol. 22(2), pages 183-207, April. [Downloadable!] (restricted)
  19. Ilya Segal., 1997. "Contracting with Externalities," Economics Working Papers 97-259, University of California at Berkeley. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
  2. Wim Fonteyne, 2007. "Cooperative Banks in Europe--Policy Issues," IMF Working Papers 07/159, International Monetary Fund. [Downloadable!]
  3. Astrid Coates & Wim Van Opstal, 2009. "The Joys and Burdens of Multiple Legal Frameworks for Social Entrepreneurship. Lessons from the Belgian Case," Working Papers on Social and Co-operative Entrepreneurship 0903, Katholieke Universiteit Leuven, HIVA, Cera Centre for Co-operative Entrepreneurship. [Downloadable!]
  4. 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. [Downloadable!]
  5. M. Shahid Ebrahim, 2008. "Can an Islamic Model of Housing Finance Cooperative Elevate the Economic Status of the Underprivileged?," Papers on Economics of Religion 08/04, Department of Economic Theory and Economic History of the University of Granada.. [Downloadable!]
  6. William R. Emmons & Frank A. Schmid, 2004. "When for-profits and not-for-profits compete: theory and empirical evidence from retail banking," Supervisory Policy Analysis Working Papers 2004-01, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
  7. Patrick Bolton & Chenggang Xu, 2001. "Ownership and Managerial Competition: Employee, Customer, or Outside Ownership," STICERD - Theoretical Economics Paper Series 412, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. [Downloadable!]
  8. 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. [Downloadable!] (restricted)
  9. Herbst, P. & Prufer, J., 2007. "Firms, Nonprofits and Cooperatives: A Theory of Organizational Choice," Discussion Paper 2007-003, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
    Other versions:
  10. Robert M. Feinberg & A.F.M. Ataur Rahman, 2006. "Are Credit Unions Just Small Banks? Determinants of Loan Rates in Local Consumer Lending Markets," Eastern Economic Journal, Eastern Economic Association, vol. 32(4), pages 647-659, Fall. [Downloadable!]
  11. Roberts, John & Van den Steen, Eric, 2000. "Shareholder Interests, Human Capital Investment and Corporate Governance," Research Papers 1631, Stanford University, Graduate School of Business. [Downloadable!]
  12. Michael Kremer, 1997. "Why are Worker Cooperatives So Rare?," NBER Working Papers 6118, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Hueth, Brent & Marcoul, Philippe, 2007. "The Cooperative Firm as Monitored Credit," Staff Paper Series 508, University of Wisconsin, Agricultural and Applied Economics. [Downloadable!]
  14. Edward L. Glaeser & Andrei Shleifer, 1998. "Not-For-Profit Entrepreneurs," NBER Working Papers 6810, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  15. Alberto Bacchiega & Gianni De Fraja, . "Constitutional Design and Investment in Cooperatives and Investor-Owned Enterprises," Discussion Papers 99/5, Department of Economics, University of York. [Downloadable!]
    Other versions:
  16. Larry Neal, 2006. "The London Stock Exchange in the 19th Century: Ownership Structures, Growth and Performance," Working Papers 115, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
  17. Jolly, Robert W. & Koppenhaver, Gary D. & Roe, Joshua D., 2004. "Growth of Large–Scale Credit Unions in Iowa: Implications for Public Policy," Staff General Research Papers 12216, Iowa State University, Department of Economics. [Downloadable!]
  18. Chong-En Bai & Chenggang Xu, 2001. "Ownership, Incentives and Monitoring," STICERD - Theoretical Economics Paper Series 413, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. [Downloadable!]
  19. Ramon Casadesus-Masanell & Tarun Khanna, 2003. "Globalization and Trust: Theory and Evidence from Cooperatives," William Davidson Institute Working Papers Series 2003-592, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  20. Matouschek, Niko, 2002. "Information and the Optimal Ownership Structure of Firms," CEPR Discussion Papers 3216, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  21. J.Cook & S.Deakin & A.Hughes, 2001. "Mutuality and Corporate Governance: The Evolution of UK Building Societies Following Deregulation," ESRC Centre for Business Research - Working Papers wp205, ESRC Centre for Business Research. [Downloadable!]
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