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Organizational Form and Efficiency: The Coexistence of Stock and Mutual Property-Liability Insurers

  • J. David Cummins

    (Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • Mary A. Weiss

    (Temple University, Philadelphia, Pennsylvania 19122)

  • Hongmin Zi

    (Sejong University, Seoul, Korea)

This article introduces a new approach, cross-frontier analysis, for estimating the relative efficiency of alternative organizational forms in an industry. The technique is illustrated by analyzing a sample of stock and mutual property-liability insurers using nonparametric frontier efficiency methods. Cross-frontier analysis measures the relative efficiency of each organizational form by computing the efficiency of each stock (mutual) firm relative to a reference set consisting of all mutual (stock) firms. We test agency-theoretic hypotheses about organizational form, including the managerial discretion and expense preference hypotheses. The results indicate that stocks and mutuals are operating on separate production and cost frontiers and thus represent distinct technologies. Consistent with the managerial discretion hypothesis, the stock technology dominates the mutual technology for producing stock outputs and the mutual technology dominates the stock technology for producing mutual outputs. However, consistent with the expense preference hypothesis, the stock cost frontier dominates the mutual cost frontier. Our findings thus suggest a richer interpretation of organizational form than provided by previous researchers.

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File URL: http://dx.doi.org/10.1287/mnsc.45.9.1254
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 45 (1999)
Issue (Month): 9 (September)
Pages: 1254-1269

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Handle: RePEc:inm:ormnsc:v:45:y:1999:i:9:p:1254-1269
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  1. Loretta J. Mester, 1989. "Testing for Expense Preference Behavior: Mutual versus Stock Savings and Loans," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 483-498, Winter.
  2. J. Cummins & Hongmin Zi, 1998. "Comparison of Frontier Efficiency Methods: An Application to the U.S. Life Insurance Industry," Journal of Productivity Analysis, Springer, vol. 10(2), pages 131-152, October.
  3. F. Fecher & D. Kessler & S. Perelman & P. Pestieau, 1993. "Productive performance of the French insurance industry," Journal of Productivity Analysis, Springer, vol. 4(1), pages 77-93, June.
  4. Mayers, David & Smith, Clifford W, Jr, 1988. "Ownership Structure across Lines of Property-Casualty Insurance," Journal of Law and Economics, University of Chicago Press, vol. 31(2), pages 351-78, October.
  5. Gardner, Lisa A. & Grace, Martin F., 1993. "X-Efficiency in the US life insurance industry," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 497-510, April.
  6. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  7. Fukuyama, Hirofumi, 1997. "Investigating productive efficiency and productivity changes of Japanese life insurance companies," Pacific-Basin Finance Journal, Elsevier, vol. 5(4), pages 481-509, September.
  8. Zvi Griliches, 1992. "Output Measurement in the Service Sectors," NBER Books, National Bureau of Economic Research, Inc, number gril92-1, March.
  9. Zvi Griliches, 1992. "Introduction to "Output Measurement in the Service Sectors"," NBER Chapters, in: Output Measurement in the Service Sectors, pages 1-22 National Bureau of Economic Research, Inc.
  10. Cummins, J. David & Weiss, Mary A., 1993. "Measuring cost efficiency in the property-liability insurance industry," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 463-481, April.
  11. Dahlby, Bev & West, Douglas S, 1986. "Price Dispersion in an Automobile Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 418-38, April.
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