Abstract. We develop a nancial-contracting theory of the cooperative rm 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 nal output; and directors monitor managers. We model the cooperative rm 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 deadweight loss. Our theory provides new insight with respect to a substantial theoretical and empirical literature on the life cycle of worker-managed rms, 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 dierences between the board compensation policies of cooperative rms, where members typically receive little more than travel and per-diem reimbursements, and of investor-owned rms, where members receive substantial pay often based in part on rm nancial performance
