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Cooperatives vs. outside ownership

Hart, Oliver and Moore, John (1998) Cooperatives vs. outside ownership. TE, 346. Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science, London, UK.

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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: 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.

Item Type: Monograph (Discussion Paper)
Official URL: http://sticerd.lse.ac.uk
Additional Information: © 1998 the authors
Library of Congress subject classification: H Social Sciences > HD Industries. Land use. Labor
Journal of Economic Literature Classification System: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D72 - Economic Models of Political Processes: Rent-Seeking, Elections, Legislatures, and Voting Behavior
L - Industrial Organization > L3 - Nonprofit Organizations and Public Enterprise > L31 - Nonprofit Institutions; NGOs
L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L22 - Firm Organization and Market Structure: Markets vs. Hierarchies; Vertical Integration; Conglomerates; Subsidiaries
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior; Transaction Costs; Property Rights
D - Microeconomics > D7 - Analysis of Collective Decision-Making > D71 - Social Choice; Clubs; Committees; Associations
P - Economic Systems > P1 - Capitalist Systems > P13 - Cooperative Enterprises
P - Economic Systems > P1 - Capitalist Systems > P12 - Capitalist Enterprises
Sets: Departments > Economics
Collections > Economists Online
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Research centres and groups > Financial Markets Group (FMG)
Collections > LSE Health Working Paper Series in Health Policy and Economics
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 346
Date Deposited: 14 Jul 2008 10:40
URL: http://eprints.lse.ac.uk/19360/

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