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MORAL HAZARD AND LABOUR-MANAGED FIRMS IN ITALY AFTER THE LAW N. 142/2001

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  • Francesco REITO

Abstract

Instead of focusing on the difference between a labour-managed (LMF) and a profit maximizing firm (PMF) in terms of final out-come and occupation, this paper considers the actual possibility for a firm to be financed from outside. A simple case of moral hazard in the credit market is analyzed. A bank, for limited funds, can finance one of two potential firms, a LMF or a PMF, both with similar project size. The Italian case is taken into account: the law n. 142/2001 has equalized the position of workers and members of a LMF as (own) firm creditors during a liquidation. This has an effect on the structure of creditors priorities in case a firm goes bankrupt and, in particular, on money-lenders likelihood of getting their loans back. It is argued that, before the law, the LMF had in general an advantage on the PMF, from banks viewpoint, for it faced a lower moral hazard problem on effort contribution. After the law, even though the direct consequence seems to be a draw back in LMF credit-worthiness, the model shows that, on given conditions, this type of firm remains more competitive as a bank borrower. Copyright © 2008 The Authors Journal compilation © CIRIEC 2008.

Suggested Citation

  • Francesco REITO, 2008. "MORAL HAZARD AND LABOUR-MANAGED FIRMS IN ITALY AFTER THE LAW N. 142/2001," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 79(2), pages 249-267, June.
  • Handle: RePEc:bla:annpce:v:79:y:2008:i:2:p:249-267
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