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Cooperatives vs. Outside Ownership

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Abstract

We are concerned with the design of a constitution for a firm - an ex-ante contract which assigns residual rights of control (and possibly residual income rights) without reference to the issue to be decided. We focus attention on two polar constitutions: nonprofit cooperatives and outside ownership. In the former, ownership is shared among a group of consumers on a one member, one vote basis. In the latter, all control rights and rights to residual income are allocated to an outsider. Ex-post, agents are assumed to have asymmetric information, which rules out recontracting. We have two main results. First, in the case of perfect competition, an outside owner achieves the first-best; a cooperative typically does not, because the rent from any cost advantage relative to the market is used to shield members from competitive pressure, and the median voter's preferences may not reflect average preferences. Second, in the case where members of a cooperative have common preference orderings they unanimously vote for the first-best; an outsider owner typically makes inefficient decisions, tailored to the marginal rather than to the average consumer.

Suggested Citation

  • Oliver Hart & John Moore, 1998. "Cooperatives vs. Outside Ownership," ESE Discussion Papers 114, Edinburgh School of Economics, University of Edinburgh.
  • Handle: RePEc:edn:esedps:114
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    More about this item

    Keywords

    cooperatives; firms; ownership; property rights;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • P12 - Economic Systems - - Capitalist Systems - - - Capitalist Enterprises
    • P13 - Economic Systems - - Capitalist Systems - - - Cooperative Enterprises

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