Governance of collective entrepreneurship

This paper studies optimal allocation of control rights in collective organizations where members are heterogeneous across their opportunity costs and knowledgeability (expertise). Three results are established. First, members’ heterogeneity is costly as it makes communication coarse and hampers decision making. Second, efficient allocation of control rights entails granting the decision rights to the members who are more (less) inclined to implement projects when the market is (not) ripe with profitable projects. This result, however, requires that members with the control rights are highly knowledgeable. Third, governance structure determines who bears the cost of heterogeneity, whereas the market determines who benefits from it. Members shouldering the costs should be compensated to be willing to join the collective organization. Governance structure and the market are therefore intertwined. Consequently, efficient allocation of control rights might not be viable. One implication is that it is unlikely that junior members have decision authority in heterogeneous partnerships. Another implication is that the viability of collective entrepreneurships is problematic in many settings.