The Cooperative Firm as Monitored Credit
32 Pages Posted: 11 Jun 2007 Last revised: 23 Nov 2008
Date Written: November 20, 2008
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: Suggested Citation