Griffith, 2005). Therefore, in this case the net impact on technical efficiency of jointly increasing product market competition and financial pressure has to be positive. However, the empirical evidence on this point is rather ambiguous.
Indeed, empirically increasing competition appears to increase productivity levels in firms with low debt pressure. Nickellet al. (1997) have looked at the joint impact of financial pressure and product market competition on productiv- ity growth in a data-set of British firms and have found that as financial pressure increases, the impact of competition decreases; in other words they are substi- tute. Also, there is no evidence of a positive interaction between increasing product market competition and financial pressure in fostering productivity growth. Indeed, Aghionet al. (2003) have considered the joint impact of finan- cial pressure and competition on patent counts (a measure of firms’ innovation) in a data-set of British firms listed on the London Stock Exchange Market. They have identified the firms facing the highest financial pressure in order to consider whether the impact of competition differs for them relative to the whole sample of firms. Their results suggest that financial pressure and competition are neither complementary nor substitutes in order to increase firms’ productivity. Overall, these results have cast some doubts on the extent to which slack reduction is the main channel through which increasing competition and increasing financial pressure can jointly enhance productivity (both in growth and in level). However, these mixed results may be explained by recalling that theoretically the comple- mentarities between financial pressure and product market competition rely on the assumption that the firms’ managers have a preference for a high level of slack. Now it is possible that these firms in the sample are too heterogeneous to satisfy this theoretical requirement (in other words, their managers might have a preference for a low level of slack).
In this chapter I consider again the relationship among technical efficiency, product market competition and financial pressure but, unlike the previous liter- ature, I focus on the producers’ cooperatives. The reasons for this choice can be outlined as follows. Cooperatives tend to be a rather homogeneous type of firm where for organizational reasons there is an immediate link between workers’
share of surplus and the co-op’s performance. Indeed, workers (whether members or not of the cooperative) receive a profit-sharing bonus that is a direct function of the firm’s profits (Perotin and Robinson, 1998). Also cooperatives have been subject in recent years to a substantial increase in the level of product market competition they face (Birgegaard and Genberg, 1994; Filippi, 2004).
The increasing integration of what were once national product markets implies that even co-ops (traditionally operating in niche segments of national markets) have to face increasing competitive pressure from foreign firms, as it happens with conventional firms (Maietta and Sena, 2007). At the same time, it is well known that cooperatives are traditionally subject to substantial financial con- straints (Hailu et al., 2007) and therefore this makes them a very interesting case-study to analyse how these two forces (state of competition in the product market and increasing financial pressure) interact with each other and how they jointly affect technical efficiency.
In some sense this is not very different from asking (a) whether co-ops are more or less efficient than conventional firms, and (b) what are the determinants of these efficiency differentials. Now it is a contentious issue in the economic literature whether cooperatives tend to be more (or at least as) efficient than (as) conventional firms (Porter and Scully, 1987; Bonin et al., 1993). From a theo- retical standpoint, there are a number of reasons why a cooperative should experience a higher level of efficiency than a conventional firm. A first group of theories emphasizes the positive impact that profit sharing can have on workers’
effort (Uvalic, 1991; Weitzman, 1995; Blair, 1995, 1999; Cahuc and Dormont, 1997). In a conventional firm, asymmetric information does not allow the man- agement to verify the workers’ effort and so workers may prefer to shirk and so exert the less than optimal level of effort. The profit-sharing agreement existing in a cooperative may help to realign the workers’ incentives to those of the firm in several ways. It may enhance workers’ effort in return for what they could per- ceive as the company’s fairness in letting them participate in the economic success of the firm (so-called gift exchange) (Sessions, 1992). Profit sharing may also provide employees in a cooperative with an incentive to monitor each other and put pressure on shirkers (Jones and Svejnar, 1982). Finally, it may give workers and managers the incentive to circulate information, which in turn may limit the asymmetric information problem and so increase the productivity (Cable and Wilson, 1990). A second group of theories looks at the role that profit sharing in a cooperative can have on the workforce attributes, for instance skill levels. It is well known that in conventional firms workers may not be willing to invest in firm-specific skills. The reasons for this are well articulated in Hart (1995). When the workers’ investment is not contractible (i.e. contracts are incomplete) and, at the same time, workers have to bear all the costs of the investment, they may cor- rectly anticipate that the firm will try to expropriate them after the investment has been made. Therefore, they find it optimal to under-invest. Profit sharing can, however, help to solve this problem. Indeed, with profit sharing workers are made residual claimants of the firm, as they are entitled to a portion of the profits. In this case, workers, aware of the fact that some of the improved performance will accrue to them, will be willing to invest in costly firm-specific skills as profit- sharing reduces the potential for ex-post expropriation.
As the above-mentioned literature, the purpose of this chapter is to understand what factors may explain the fact that cooperatives tend to be more efficient than conventional firms. However, it differs from the previous literature in that I focus on the role that the state of competition in the product market and the financial pressure can jointly play to improve the co-ops’ technical efficiency. A certain number of papers have analysed the possibility that co-ops’ efficiency can be affected either by the state of competition in the product market or by the finan- cial pressure the co-op is exposed to (see Maietta and Sena, 2004, 2007; Hailu et al. 2007). In both cases, the mechanisms through which either increasing competition or increasing financial pressure can independently have a positive impact on co-ops’ efficiency are well established: consider a cooperative where workers (a) have control rights over a specific “asset”, their effort and, (b) are
paid by a fixed fraction of the overall surplus. The cooperative organizing the production uses both capital and the workers’ effort as inputs. To be able to produce, the cooperative needs the workers’ effort: that is, without the workers’
effort, production cannot start. I assume there is a lag between the time the firm starts the production and the time the workers decide on effort, and therefore, because of this, a standard hold-up problem arises (Hart, 1995). Workers supply the amount of effort that maximizes their own expected pay-off from the relation- ship with the firm, instead of the overall surplus (that is, both the workers’ and the co-op’s surplus). Therefore, the supplied effort is sub-optimal from the firm’s standpoint and so it will be technically inefficient, as the actual output will be lower than the potential output (or the output produced by the other firms in the industry). Suppose now there is an increase in the competition faced by the coop- erative in the market. This may be due to several factors, some of which are related to economic policy (like the reduction of tariffs and other artificially created barriers to entry) and some to consumers’ tastes. From the workers’
standpoint, this implies that their profit-sharing bonus decreases as well and therefore they may want to readjust their effort so to counterbalance the effect of the negative shock on the profit-sharing bonus. However, this will not have any impact on the profit-sharing bonus at this stage (as the level of effort is decided in the period before the shock) but it will have an effect on the next period’s bonus.
These re-adjustments affect the firm’s technical efficiency. As workers increase their investment, the actual output increases and gets closer to the potential output. The result is that inefficiency for the firm reduces over time. The mechan- ism is not very different when the impact of financial pressure on a cooperative’s technical efficiency is considered. Workers of a cooperative receive a financial bonus that is proportional to the co-op’s realized profits; obviously if they antici- pate the possibility that the bonus can decrease following an increase in the finan- cial pressure, they will increase their effort and reduce the internal inefficiencies in the co-op. Also, the model predicts that as financial pressure increases then the impact of increasing product market competition on technical efficiency will be larger than an absence of financial pressure. So the model provides two hypothe- ses to test: the first one is that increases in the financial pressure are followed by increases in technical efficiency. The second one is that competition and financial pressure can jointly increase technical efficiency. The first hypothesis will be tested by estimating a reduced form model where measures of technical effi- ciency (calculated by using Data Envelopment Analysis – DEA) are regressed on indicators of financial constraints (as already done in the previous chapter). After- wards, I test empirically the extent to which financial pressure and state of competition in the product market are substitutes or complementary in a panel of Italian cooperative firms, specializing in the production of wine, over the time 1996–2001. This will be done by estimating a one-stage stochastic production frontier where measures of technical efficiency are computed conditional on a set of factors (in this case, state of competition in the product market and financial pressure) that can explain the distribution of scores across firms (Battese and Coelli, 1995). Stochastic frontiers have been widely used in the comparative
economics literature and the literature on workers’ participation to compare the effects of different types of ownership on technical efficiency (Ferrantino et al., 1995; Mosheim, 2002). This methodology offers the advantage that it allows us to compute the firms’ technical efficiency while at the same time controlling for the factors that can affect the dispersion of efficiency across the firms. The choice of Italy is due to the fact that this country has got a very large cooperative sector and indeed, not surprisingly, several studies have been conducted on Italian coop- eratives with the purpose of testing several hypotheses of the literature on co-ops (Jones and Svejnar, 1985; Bartlettet al., 1992).
The structure of the chapter is the following. Section 4.2 formalizes in a simple partial equilibrium model the relationship between competition, technical efficiency and financial pressure in a producer’s co-op. The empirical model and the results are presented in Section 4.3. Finally, some concluding remarks are offered in Section 4.4.