The Horizon Problem Reconsidered
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.
|Date of creation:||2005|
|Date of revision:|
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- Douglas W. Diamond & Philip H. Dybvig, 2000.
"Bank runs, deposit insurance, and liquidity,"
Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
- Rey, Patrick & Tirole, Jean, 2000. "Loyalty and Investment in Cooperatives," IDEI Working Papers 123, Institut d'Économie Industrielle (IDEI), Toulouse.
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- 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.
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