Managing Contractual Risk Through Organization: Strategic Vs. Consensual Networks

47 Pages Posted: 6 Oct 2004

See all articles by Martin Desrochers

Martin Desrochers

Developpement International Desjardins

Klaus P. Fischer

affiliation not provided to SSRN

Jean-Pierre Gueyie

University of Quebec in Montreal-Department of Finance

Date Written: May 2004

Abstract

This paper presents a study of the economic organization of systems of financial cooperatives (FC). The first part is a theoretical framework rooted in principles of transaction cost economics that seeks to explain empirical regularities observable in systems of FC worldwide. The second part is an empirical analysis that compares the Quebec Desjardins Movement (DM) and the Ontario Credit Union (OCU) system that are both organized as networks with different degree of development. The fundamental proposition is that networks, particularly strategic networks, are a superior form of governance mechanism for relatively wide ranges of contractual hazard and size of institutions. Strategic networks provide a substitute control mechanism when the size of the institution dilutes internal governance mechanisms. It thus discourages subgoal pursuits and expense preferences, and possibly economizes on bounded rationality both occurring in large FC. The theory allows us to generate a set of testable hypotheses of which three are tested in the paper, namely: i). Over a range of small FC, differences in efficiency will be relatively small, if any. ii). Large independent institutions should display systematically lower efficiency than similar sized FC members of strategic networks. iii). FC in strategic networks should display lower variance in size as well as in performance indicators. Our empirical results are consistent with these theoretical propositions. Opponents to networks often argued that the benefits associated to the vast array of financial services offered to large sectors of the population, and in particular to rural communities, come at a heavy price of running an expensive bureaucracy. Our data suggest that the success of the DM in servicing its vast and rural clientele effectively comes at a price. But, even paying this price, the DM outperforms the OCU system.

Keywords: Transaction cost economics, financial cooperatives, networks, corporate governance, technical efficiency, X-Efficiency

JEL Classification: G2, G3

Suggested Citation

Desrochers, Martin and Fischer, Klaus P. and Gueyie, Jean-Pierre, Managing Contractual Risk Through Organization: Strategic Vs. Consensual Networks (May 2004). Available at SSRN: https://ssrn.com/abstract=600003 or http://dx.doi.org/10.2139/ssrn.600003

Martin Desrochers

Developpement International Desjardins ( email )

Levis G6V 6P8, Quebec
Canada

Klaus P. Fischer (Contact Author)

affiliation not provided to SSRN

Jean-Pierre Gueyie

University of Quebec in Montreal-Department of Finance ( email )

School of Business Administration
Montreal, Quebec H3C 4R2
Canada
514-987-3000, x2358 (Phone)
514-987-0422 (Fax)

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