Acemoglu, Daron, 2003, “The Form of Property Rights: Oligarchic vs. Democratic Societies,” NBER Working Papers No. 10037. (Cambridge, Massachussetts: National Bureau of Economic Research).
Aghion, Philippe, and Patrick Bolton, 2003, “Incomplete Social Contracts,” Journal of the European Economic Association, Vol. 1, pp. 38-67.
Barzel, Yoram, and Tim R. Sass, 1990, “The Allocation of Resources by Voting,” The Quarterly Journal of Economics, Vol. 105, pp. 745-771.
Benham, Lee, and Philip Keefer, 1991, “Voting in Firms: The Role of Agenda Control, Size and Voter Homogeneity,” Economic Inquiry, Vol. 29, pp. 706-719.
Besley, Timothy, and Stephen Coate, 1998, “Sources of Inefficiency in a Representative Democracy: A Dynamic Analysis,” American Economic Review, Vol. 88, pp. 346-75.
Bolton, Patrick, and Chenggang Xu, 2001, “Ownership and Managerial Competition: Employee, Customer or Outside Ownership,” Sticerd Discussion Paper TE/01/412 (London: London School of Economics).
Bonin, John, Derek C. Jones, and Louis Putterman, 1993, “Theoretical and Empirical Studies of Producer Cooperatives: Will Ever the Twain Meet?,” Journal of Economic Literature, Vol. 31, pp. 1290-1320.
Burgess, Simon, Julia Lane, and Kevin McKinney, 2004, “Matching, Reallocation and Changes in Earnings Dispersion,” (unpublished; Bristol: Bristol University).
Canton, Erik, Henri de Groot, and Richard Nahuis, 2002, “Vested interests, population ageing and technology adoption,” European Journal of Political Economy, Vol. 18, pp. 631-652.
Davis, Kevin, 2001, “Credit Union Governance and Survival of the Cooperative Form,” Journal of Financial Services Research, Vol. 19, pp. 197-210.
Djankov, Simeon, Edward L. Glaeser, Florencio Lopez de Silanes, Rafael La Porta, and Andrei Shleifer, 2003, “The New Comparative Economics,” Journal of Comparative Economics, Vol. 31, pp. 595–619.
Fonteyne, Wim, 2007, “Cooperative Banks in Europe–Policy Issues,” IMF Working Paper No. 07/159, (Washington: International Monetary Fund).
Goddard, John, and John O. S, Wilson, 2005, “US Credit Unions: An Empirical Investigation of Size, Age and Growth,” Annals of Public and Cooperative Economics, Vol. 76, pp. 375-406.
Grossman, Ssanford J., and Oliver Hart, 1986, “The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration,” Journal of Political Economy, Vol. 94, pp. 691-719.
Hart, Oliver, and John Moore, 1990, “Property Rights and the Nature of the Firm,” Journal of Political Economy, Vol. 98, pp. 1119-1158.
Hart, Oliver, and John Moore, 1998, “Cooperatives versus outside ownership,” NBER Working Papers No. 6421. (Cambridge, Massachussetts: National Bureau of Economic Research).
Juhn, Chinhui, Kevin M. Murphy, and Brooks Pierce, 1993, “Wage Inequality and the Rise in the Returns to Skill,” Journal of Political Economy, Vol. 101, pp. 410-42.
Katz, Lawrence, and David Autor, 2000, “Changes in the Wage Structure and Earnings Inequality,” Handbook of Labor Economics vol. III, Orley Ashenfelter and David Card, eds. (Amsterdam: Elsevier).
Kremer, Michael, 1997, “Why are Worker Cooperatives So Rare?,” NBER Working Papers No. 6118. (Cambridge, Massachussetts: National Bureau of Economic Research).
Kremer, Michael, 1999, “Worker Cooperatives as Economic Democracies,” (unpublished; Cambridge: Massachusetts Institute of Technology).
Krusell, Per, Lee Ohanian, Victor Rios-Rull, and Giovanni Violante, 2000, “Capital Skill Complementary and Inequality,” Econometrica, Vol. 68, pp. 1029-1053.
Levin, Jonathan, and Steven Tadelis, 2005, “Profit Sharing and the Role of Professional Partnerships,” Quarterly Journal of Economics, Vol. 120, pp. 131-171.
Levy, Frank, and Richard J. Murnane, 1992, “U.S. Earnings Levels and Earnings Inequality: A Review of Recent Trends and Proposed Explanations,” Journal of Economic Literature, Vol. 30, pp. 1333-81.
Mailath George W., and Andrew Postlewaite, 1990, “Asymmetric Information Bargaining Problems with Many Agents,” Review of Economic Studies, Vol. 57, pp. 351-67.
Morrison, Alan, and William J. Wilhelm, 2004, “Partnership Firms, Reputation and Human Capital,” American Economic Review, Vol. 94, pp. 1682-1692.
Morrison, Alan, and William J. Wilhelm, 2008. “The Demise of Investment Banking Partnerships: Theory and Evidence,” Journal of Finance, Vol. 43, pp. 311-350.
Perotti, Enrico, and Ernst-Ludwig von Thadden E, 2006, “The Political Economy of Corporate Control and Labor Rents,” Journal of Political Economy, Vol. 114, pp. 145-176.
Rajan, Raghuram, and Luigi Zingales, 2001, “The Firm as a Dedicated Hierarchy: A Theory of the Origins and Growth of Firms,” The Quarterly Journal of Economics, Vol. 116, pp. 805-851.
Rajan, Raghuram, and Luigi Zingales, 2003, “The Great Reversals: The Politics of Financial Development in the Twentieth Century,” Journal of Financial Economics, Vol. 69, pp. 5-50.
Rey, Patrick, and Jean Tirole, 2007, “Financing and access in cooperatives,” International Journal of Industrial Organization, Vol. 25, pp. 1061-1088.
Roberts, John, and Eric Van den Steen, 2001, “Human Capital and Corporate Governance,” in Corporate Governance: Essays in honor of Horst Albach, Joachim Schwalbach, and Horst Albach, ed. (Heidelberg: Physica-Verlag).
Valderrama, Laura, 2009a, “Dynamic Voting under Moral Hazard” IMF Working Paper (Forthcoming) (Washington: International Monetary Fund).
The author is grateful to Timothy Besley, Simon Johnson, Nobuhiro Kiyotaki, John Moore, Raghuram Rajan, Mathias Thoenig, Jérôme Vandenbussche, Thierry Verdier, and Randall Wright for their suggestions, and seminar participants at the London School of Economics, DELTA, Federal Reserve Bank of Cleveland, International Monetary Fund, Paris School of Economics, Copenhagen Business School, Universitat Pompeu i Fabra, Universitat Autonoma, and Universidad de Navarra.
We use the terms cooperative and partnership interchangeably throughout the paper.
Similarly, Canton, de Groot and Nahuis (2002) explain the failure to adopt more efficient technologies through heterogeneous costs of adoption for workers of different age.
Bar-Isaac (2007) also discusses the signaling role of partnerships. In a model of adverse selection, senior partners may choose to work with junior associates and build on the latter’s reputational concerns for career advancement as a signal of the firm’s quality in front of uninformed clients.
Borrowing may be unfeasible or excessively costly due to the high interest rate required as a way to compensate for the potential opportunistic behavior of employees with full control rights over the firm’s decisions.
The role of majority voting in rendering cooperatives inefficient has been put forward by Barzel and Sass (1990), Bonin, Jones and Putterman (1993), and Hansmann (1996). Similarly, Alboeck and Schultz (1997), Barzel and Sass (1990) and Aghion and Bolton (2003) deal with the optimal allocation of votes and/or the voting rule which is conducive to minimizing the costs of decision making.
Krusell et al. (2000) and Jovanovic (2007) rely on the complementarity between skills and technologies to explain the increase in wage inequality in several high-income countries. Acemoglu (2002) focuses on changes in the relative supplies of skilled and unskilled workers to explain endogeneous skill-biased technological change.
Their paper argues that whereas an activity among participants with similar resources and with little technological change can achieve order with little dictatorship, an activity involving players with massive inequalities of power is vulnerable to more disorder for a given level of policy, a result in line with ours.
The idea that decisions cannot be contracted upon in advance and that the owner of the equipment has the right to decide how it is used, first appeared in Grossman and Hart (1986).
We suppose equal treatment within a group of explorers of the same productivity type. Various auxiliary assumptions could be made to rationalize this.
Interestingly, the decisive factor in determining the outcome of this vote is the fraction of productive explorers on each island, not the exact numbers of explorers in each of the four categories.
There is an alternative way to motivate the assumption of partial expropriation. Assume that high types need to exert effort in order to be productive. If effort is costly and non-verifiable, the anticipation of expropriation will lead to underinvestment in effort. In equilibrium, expropriation, if positive, will be limited so as to induce high types not to shirk.
The result that, for a sufficiently high number of agents, free riding precludes efficient transfers under private information dates back to Mailath and Postlewaite (1990).
This logic might suggest that an employee may also prefer to be a high type under project j, rather than a low type under project i. If this were the case, whenever the inefficient project j was egalitarian, a cooperative would always be inefficient since the pivotal type is then (lh). Yet, this is not always true. If project i is efficient enough–specifically, if
At this point, it is important to emphasize that Lemma 1 underpins Proposition 1. To illustrate why, let us look back at the example presented in footnote 5, where A2 did not hold. In particular, type (hl), although decisive at date 2, failed to win the date 1 vote.
Given that fixi = 4.2 > 4 = fjxj, project i is efficient. Also, as xj > xi and
On the other hand, notice that an outside-owned firm will choose the efficient project since fi (xi − wi) = 1.4 > 0.8 = fj (xj − wj). Although the extent of expropriation is the same across technologies, project i delivers a higher number of high types. Thus, here is an example where Lemma 1 fails and the cooperative is more biased towards polarized projects than an outside owner.
We might think of a more stringent voting rule, i.e. qualified majority. A more inclusive rule would be more conducive to constitutional inertia (as private information rules renders bargaining unfeasible). Our results would then be reinforced.
The Mondragon Cooperative Corporation based in Spain consists of over 150 companies in sectors such as manufacturing and engineering, as well as retail, finance and education.
For a recent overview of the credit union industry in Europe and the U.S., see Fonteyne (2007) and Goddard and Wilson (2005), respectively. While credit unions are owned by their customers (not their workers), it is easy to imagine how to translate our results to the case of customer cooperatives.