Organizational Form and Payoff Imbalances in an Aggrievement Model: Cooperatives Versus Markets

Hart and Holmstrom (2010) claim that organizational form conditions the sense of entitlement of the parties. This determines their feeling of being aggrieved by the outcome of the contract and therefore their shading, which creates deadweight losses. Cooperatives constitute integrated organizational forms while privately owned firms are nonintegrated. The main result obtained states that if the intensity of shading depends positively on the existing payoff imbalances between bosses and managers, then (non)integration with coordination is more plausible when the profits of bosses and benefits of managers are (dis)similar. Moreover, given plausible parameter constraints, we illustrate how both organizational forms, an integrated cooperative and a nonintegrated private firm, may coexist in a coordinated equilibrium and how the former may even obtain a higher social surplus than the latter one.