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Cooperatives vs. Outside Ownership

55 Pages Posted: 4 Aug 2000 Last revised: 8 Oct 2010

Oliver Hart

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

John Moore

University of Edinburgh - Economics; London School of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: February 1998

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.

Suggested Citation

Hart , Oliver and Moore, John, Cooperatives vs. Outside Ownership (February 1998). NBER Working Paper No. w6421. Available at SSRN: https://ssrn.com/abstract=226168

Oliver D. Hart (Contact Author)

Harvard University - Department of Economics ( email )

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John Hardman Moore

University of Edinburgh - Economics ( email )

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London School of Economics ( email )

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