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Cooperatives vs. outside ownership

  • Oliver Hart
  • John Moore

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: non-profit 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 the 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.

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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 19360.

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Length: 54 pages
Date of creation: Jan 1998
Date of revision:
Handle: RePEc:ehl:lserod:19360
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  1. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Holmstrom, Bengt & Myerson, Roger B, 1983. "Efficient and Durable Decision Rules with Incomplete Information," Econometrica, Econometric Society, vol. 51(6), pages 1799-819, November.
  4. Oliver Hart & John Moore, 1996. "The Governance of Exchanges: Members' Co-operatives Versus Outside Ownership," STICERD - Theoretical Economics Paper Series 292, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  5. Joseph M. Ostroy, 1978. "The No-Surplus Condition as a Characterization of Perfectly Competitive Equilibrium," UCLA Economics Working Papers 139, UCLA Department of Economics.
  6. Bonin, John P & Jones, Derek C & Putterman, Louis, 1993. "Theoretical and Empirical Studies of Producer Cooperatives: Will Ever the Twain Meet?," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1290-320, September.
  7. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, vol. 8(3), pages 329-340, December.
  8. Ilya Segal., 1997. "Contracting with Externalities," Economics Working Papers 97-259, University of California at Berkeley.
  9. Michael Kremer, 1997. "Why are Worker Cooperatives So Rare?," NBER Working Papers 6118, National Bureau of Economic Research, Inc.
  10. Eric Maskin & Jean Tirole, 1997. "Unforseen Contingencies, Property Rights, and Incomplete Contracts," Harvard Institute of Economic Research Working Papers 1796, Harvard - Institute of Economic Research.
  11. repec:oup:qjecon:v:105:y:1990:i:3:p:745-71 is not listed on IDEAS
  12. Levine, David K & Pesendorfer, Wolfgang, 1995. "When Are Agents Negligible?," American Economic Review, American Economic Association, vol. 85(5), pages 1160-70, December.
  13. Abhijit Banerjee & Dilip Mookherjee & Kaivan Munshi & Debraj Ray, 1997. "Inequality, control Rights and Rent Seeking - A Theoretical and Empirical Analysis of Sugar Cooperatives in Maharashtra," Boston University - Institute for Economic Development 80, Boston University, Institute for Economic Development.
  14. Rob, Rafael, 1989. "Pollution claim settlements under private information," Journal of Economic Theory, Elsevier, vol. 47(2), pages 307-333, April.
  15. Craig, Ben & Pencavel, John, 1992. "The Behavior of Worker Cooperatives: The Plywood Companies of the Pacific Northwest," American Economic Review, American Economic Association, vol. 82(5), pages 1083-105, December.
  16. Albaek, Svend & Schultz, Christian, 1997. " One Cow, One Vote?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(4), pages 597-615, December.
  17. William R. Emmons & Willi Mueller, 1997. "Conflict of interest between borrowers and lenders in credit co- operatives: the case of German co-operative banks," Working Papers 1997-009, Federal Reserve Bank of St. Louis.
  18. Makowski, Louis, 1983. "Competition and Unanimity Revisited," American Economic Review, American Economic Association, vol. 73(3), pages 329-39, June.
  19. Segal, Ilya, 1997. "Contracting with Externalities," Department of Economics, Working Paper Series qt90c168j1, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  20. repec:oup:restud:v:57:y:1990:i:3:p:351-67 is not listed on IDEAS
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