Why are Worker Cooperatives so Rare?

38 Pages Posted: 15 May 1998  

Michael Kremer

Harvard University - Department of Economics; Brookings Institution; National Bureau of Economic Research (NBER); Center for Global Development; Harvard University - Harvard Kennedy School (HKS)

Date Written: July 1997

Abstract

This paper argues that worker cooperatives are prone to redistribution among members, and that this redistribution distorts incentives. I assume that employment contracts are incomplete. In the model cooperative members pay in a capital contribution to purchase equipment. They then receive shocks to ability. Each worker's (observable) output depends on ability and on effort, neither of which can be observed separately. After ability is realized, members vote on a wage schedule as a function of output. If the median member has less than average ability, the cooperative will vote for a redistributive schedule, dulling incentives. Whereas workers in firms owned by outside shareholders would quit if the firm redistributed away from them, cooperative members will be reluctant to leave, since this entails forfeiting the dividends on their capital contribution. The model can explain why cooperatives typically have egalitarian wage policies.

Suggested Citation

Kremer, Michael, Why are Worker Cooperatives so Rare? (July 1997). NBER Working Paper No. w6118. Available at SSRN: https://ssrn.com/abstract=44599

Michael R. Kremer (Contact Author)

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