Organizational form and efficiency: an analysis of stock and mutual property-liability insurers

This paper analyzes the efficiency of stock and mutual organizational forms in the property-liability insurance industry using nonparametric frontier efficiency methods. We test the managerial discretion hypothesis, which predicts that the market will sort organizational forms into market segments where they have comparative advantages in minimizing the costs of production, including agency costs. Both production and cost frontiers are estimated. The results indicate that stocks and mutuals are operating on separate production and cost frontiers and thus represent distinct technologies. The stock technology dominates the mutual technology for producing stock output vectors, and the mutual technology dominates the stock technology for producing mutual output vectors. However, the stock cost frontier dominates the mutual cost frontier for the majority of both stock and mutual firms. The finding of separate frontiers and organization-specific technological advantages is consistent with the managerial discretion hypothesis, but we also find evidence that stocks are more successful than mutuals in minimizing costs, suggesting the existence of agency problems in the mutual organizational form.