The Horizon Problem Reconsidered

Henrik Ballebye Olesen
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Henrik Ballebye Olesen: Copenhagen Economics

Chapter Chapter 14 in Vertical Markets and Cooperative Hierarchies, 2007, pp 245-253 from Springer

Abstract: Abstract This paper challenges the general view in the literature that cooperatives underinvest, because some members will exit the cooperative before the full benefits from their investments are harvested (the horizon problem). This paper demonstrates that full equity redemption will solve the horizon problem. The majority of members will, however, bias the exit payment to their own advantage. This will lead to overinvestment. Thus, the main finding in this paper is that if there is a horizon problem, it will lead to overinvestment – not underinvestment.

Keywords: Investment Cost; Total Payoff; Free Rider Problem; Investment Incentive; Horizon Problem (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-1-4020-5543-0_14

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DOI: 10.1007/1-4020-5543-0_14

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