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Cooperatives vs. outside ownership


  • Hart, Oliver
  • Moore, John


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.

Suggested Citation

  • Hart, Oliver & Moore, John, 1998. "Cooperatives vs. outside ownership," LSE Research Online Documents on Economics 19360, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:19360

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    References listed on IDEAS

    1. Albaek, Svend & Schultz, Christian, 1997. " One Cow, One Vote?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(4), pages 597-615, December.
    2. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    3. Holmstrom, Bengt & Myerson, Roger B, 1983. "Efficient and Durable Decision Rules with Incomplete Information," Econometrica, Econometric Society, vol. 51(6), pages 1799-1819, November.
    4. 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 1083-1105, December.
    5. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    6. George J. Mailath & Andrew Postlewaite, 1990. "Asymmetric Information Bargaining Problems with Many Agents," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 351-367.
    7. Rob, Rafael, 1989. "Pollution claim settlements under private information," Journal of Economic Theory, Elsevier, vol. 47(2), pages 307-333, April.
    8. Yoram Barzel & Tim R. Sass, 1990. "The Allocation of Resources by Voting," The Quarterly Journal of Economics, Oxford University Press, vol. 105(3), pages 745-771.
    9. Levine, David K & Pesendorfer, Wolfgang, 1995. "When Are Agents Negligible?," American Economic Review, American Economic Association, vol. 85(5), pages 1160-1170, December.
    10. Hart, Oliver & Moore, John, 1996. "The Governance of Exchanges: Members' Cooperatives versus Outside Ownership," Oxford Review of Economic Policy, Oxford University Press, vol. 12(4), pages 53-69, Winter.
    11. Ilya Segal., 1997. "Contracting with Externalities," Economics Working Papers 97-259, University of California at Berkeley.
    12. 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.
    13. Ostroy, Joseph M., 1980. "The no-surplus condition as a characterization of perfectly competitive equilibrium," Journal of Economic Theory, Elsevier, vol. 22(2), pages 183-207, April.
    14. Segal, Ilya, 1997. "Contracting with Externalities," Department of Economics, Working Paper Series qt90c168j1, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    15. 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 1290-1320, September.
    16. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, vol. 8(3), pages 329-340, December.
    17. 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.
    18. Michael Kremer, 1997. "Why are Worker Cooperatives So Rare?," NBER Working Papers 6118, National Bureau of Economic Research, Inc.
    19. 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.
    20. Makowski, Louis, 1983. "Competition and Unanimity Revisited," American Economic Review, American Economic Association, vol. 73(3), pages 329-339, June.
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    More about this item


    Cooperatives; firms; ownership; property right.;

    JEL classification:

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


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