Cooperatives vs. Outside Ownership

Oliver D. Hart and John Moore

No 6421, NBER Working Papers from National Bureau of Economic Research, Inc

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: nonprofit 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 outside owner typically makes inefficient decisions, tailored to the marginal rather than to the average customer.

JEL-codes: D21 G32 (search for similar items in EconPapers)
Date: 1998-02
Note: CF
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Related works:
Working Paper: Cooperatives vs. Outside Ownership (1998)
Working Paper: Cooperatives vs. Outside Ownership (2004)
Working Paper: Cooperatives vs. Outside Ownership (1998)
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