The Cooperative Firm as Monitored Credit

32 Pages Posted: 11 Jun 2007 Last revised: 23 Nov 2008

See all articles by Brent Hueth

Brent Hueth

affiliation not provided to SSRN

Philippe Marcoul

University of Alberta - Department of Rural Economy

Date Written: November 20, 2008

Abstract

We develop a financial-contracting theory of the cooperative firm where production requires three generic tasks: working, managing, and monitoring. Workers provide an intermediate input (or labor directly); managers convert the workers' input into a final output; and directors monitor managers. We model the cooperative firm by letting the workers act also as directors. We show how bundling the labor and monitoring tasks can expand the scope for equilibrium market activity, even when doing so results in a strictly positive dead weight loss. Our theory provides new insights with respect to a substantial theoretical and empirical literature on the life cycle of worker-managed firms, and with respect to a complementary body of anecdotal evidence on the causes of worker buyouts and cooperative degeneration. Our theory is also consistent with differences between the board compensation policies of cooperative firms, where members typically receive little more than travel and per-diem reimbursements, and of investor-owned firms, where members receive substantial pay often based in part on firm financial performance.

Keywords: Cooperative Firm, Monitoring, Financial Contracting

JEL Classification: L2, G3, D82, J54, P13, Q13

Suggested Citation

Hueth, Brent and Marcoul, Philippe, The Cooperative Firm as Monitored Credit (November 20, 2008). Available at SSRN: https://ssrn.com/abstract=991864 or http://dx.doi.org/10.2139/ssrn.991864

Brent Hueth

affiliation not provided to SSRN

Philippe Marcoul (Contact Author)

University of Alberta - Department of Rural Economy ( email )

Edmonton, Alberta
Canada

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