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The Horizon Problem Reconsidered

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  • Olesen, Henrik Ballebye

Abstract

This paper challenges the general view in the literature that cooperatives underinvest, because some members will exit the cooperative before the full benefits from their investments are harvested (the horizon problem). This paper demonstrates that full equity redemption will solve the horizon problem. The majority of members will, however, bias the exit payment to their own advantage. This will lead to overinvestment. Thus, the main finding in this paper is that if there is a horizon problem, it will lead to overinvestment not underinvestment.

Suggested Citation

  • Olesen, Henrik Ballebye, 2005. "The Horizon Problem Reconsidered," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24489, European Association of Agricultural Economists.
  • Handle: RePEc:ags:eaae05:24489
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    File URL: http://purl.umn.edu/24489
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    References listed on IDEAS

    as
    1. Borgen, Svein Ole, 2004. "Rethinking incentive problems in cooperative organizations," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 33(4), pages 383-393, September.
    2. Rey, Patrick & Tirole, Jean, 2000. "Loyalty and Investment in Cooperatives," IDEI Working Papers 123, Institut d'Économie Industrielle (IDEI), Toulouse.
    3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    4. Porter, Philip K & Scully, Gerald W, 1987. "Economic Efficiency in Cooperatives," Journal of Law and Economics, University of Chicago Press, vol. 30(2), pages 489-512, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    cooperatives; investment incentives; financial structure; Agribusiness; D23; J54; P13;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • J54 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Producer Cooperatives; Labor Managed Firms
    • P13 - Economic Systems - - Capitalist Systems - - - Cooperative Enterprises

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