Workers’ Effort: A Comparison Between Capitalist and Cooperative Firms

Abstract

The purpose of this paper is to establish a comparison between capitalistic and cooperative firms by focusing on workers’ effort during productive activity in a model in which owners and/or managers suffer from information asymmetries. In our model agency relations do not mainly concern the design of incentive mechanisms but the setting of an optimal form of monitoring, centered on management control (albeit incomplete) on workers' effort during production. By using a principal-­‐agent framework, we show that in the presence of information asymmetries on the actual effort offered by each worker, the cooperative firm requires less monitoring to achieve an optimal level of worker effort. Being also owners of the firm and choosing the person responsible for management functions inside their circle, cooperative workers develop relations based on solidarity and forms of ‘peer monitoring’ which reduce monitoring costs. Consequently, the manager of the cooperative firm can devote more of his/her effort to organizational activity which increases the efficiency of the production process. Hence, in terms of working effort, governance in the cooperative firm is more efficient than in the capitalist firm. However, the opposite result is achieved when the purchasing cost of capital in the two kinds of firm is taken into consideration. Therefore, the financial constraints to the purchase of capital reduce the production efficiency of the cooperative relatively to the capitalistic firm. In addition, such constraints represent an obstacle to achieving an optimal rate of long-­‐term growth for the cooperative firm and benefiting from the related virtuous circle between increases in the level of employment and growth rate.The purpose of this paper is to establish a comparison between capitalistic and cooperative firms by focusing on workers’ effort during productive activity in a model in which owners and/or managers suffer from information asymmetries. In our model agency relations do not mainly concern the design of incentive mechanisms but the setting of an optimal form of monitoring, centered on management control (albeit incomplete) on workers' effort during production. By using a principal-­‐agent framework, we show that in the presence of information asymmetries on the actual effort offered by each worker, the cooperative firm requires less monitoring to achieve an optimal level of worker effort. Being also owners of the firm and choosing the person responsible for management functions inside their circle, cooperative workers develop relations based on solidarity and forms of ‘peer monitoring’ which reduce monitoring costs. Consequently, the manager of the cooperative firm can devote more of his/her effort to organizational activity which increases the efficiency of the production process. Hence, in terms of working effort, governance in the cooperative firm is more efficient than in the capitalist firm. However, the opposite result is achieved when the purchasing cost of capital in the two kinds of firm is taken into consideration. Therefore, the financial constraints to the purchase of capital reduce the production efficiency of the cooperative relatively to the capitalistic firm. In addition, such constraints represent an obstacle to achieving an optimal rate of long-­‐term growth for the cooperative firm and benefiting from the related virtuous circle between increases in the level of employment and growth rate.Refereed Working Papers / of international relevanc