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.
where yi,t is the good produced by firm i, yis an index of the overall market demand, assumed for simplicity to be equal to 1 and 0 < θ< 1. Consistently with the previous literature, θis an indicator of product market competition, where a large value is an indication that product market competition is intense. Many different factors, some related to specific policies and some to consumers’ taste, affect the intensity of competition in the product market. Among the policy- related factors we find tariffs and other artificially created barriers to entry that reduce competition, as well as policies that advance competition by introducing product standardization. Among the taste-related factors, I notice that firms can avoid competition by exploiting the fact that consumers typically may have a preference for a particular variety of brands.
The main difference between the co-ops and the conventional firms is that the former reward their workers with a share si of the profit pi,tyi. Indeed, it is common practice in Italian producers’ co-ops that workers receive additional bonus payments that depend on the level of the profits. Here I capture this fact by assuming that the financial reward is related to the profits, and for simplicity I assume that the wage is equal to this financial reward. The per period utility function of the worker is defined as:
(4.3) with ci,tbeing the consumption of the worker employed in the firm i at time t.
The budget constraint for workers in a co-op is ci,tsipi,tyi. Lifetime utility is then:
(4.4) where δis the discount factor and e – 1 = 0.
From now on, I focus on the co-op’s case and I derive the expression for the co-op’s technical efficiency by backward induction. Therefore, the timeline of the model is as follows. At time 0, the co-op is set up and the worker is hired. At time 1, the worker decides on e. At time 2, capital is bought and so production can take place. Output is then sold and the surplus shared between the worker and the co-op’s owners. The worker consumes at the end of the period. Also in this case (as in the previous chapter), the hold-up problem can arise: the difference now is that it is the worker who is involved in it (rather than the manager as in the previ- ous chapter), as he maximizes his own expected pay-off from the relationship with the co-op, instead of the overall surplus (that is, both the worker’s and co- op’s surplus). Therefore, the effort is optimal from the worker’s standpoint, but not for the co-op. For this reason, the co-op’s actual output will differ from the output it could potentially produce if there was no hold-up problem and so it will appear technically inefficient. In period 2, the worker is not going to supply any effort (as there is no future) and now production takes place:
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(4.5) and the worker’s profit-sharing bonus (that is consumed by the worker) is si,2y1,2. In period 1, the worker’s effort choice is:
(4.6)
(4.7) In period 0, the worker faces a similar problem and he chooses similarly. Effort is increasing in the degree of competition (θ) and decreasing in the measure of financial constraint.
Proposition 1.An unexpected increase in product market competition induces an increase of the worker’s effort. The same goes for an unexpected increase in the financial pressure.
Proof.Compute the derivative of the optimal effort with respect to θ:
(4.8) Also the second derivative of (4.8) with respect to the measure of financial con- straint will be positive as well:
(4.9) Consider now a relaxation of the financial constraint that induces an increase of the stock of capital available to the co-op for production. In this case:
(4.10) The reasons for these results are no different from the ones I have considered in the previous chapter. The worker makes his effort decision based on his expectations about future revenues. If he anticipates that either competition gets stiffer or financial pressure increases and that therefore his expected profit-sharing bonus will decrease, he decides to spend more effort so to increase the firm’s output and this way his profit-sharing bonus. Also, the impact of increasing product market competition on effort will be larger, the higher the financial pressure as the worker anticipates these two forces will
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jointly affect adversely the profit-sharing bonus and he will try to offset them by increasing his effort.
I can measure technical efficiency in firm i in period t as the ratio between the actual level of output produced at time t by the firm i (yi,t), and the output of the best-practice firm, which could be produced at time t (yˆi,t) (Farrell, 1957). The best-practice firm may be either a co-op or a conventional firm:
(4.11) My main interest is to find out how technical efficiency in periods 1 and 2 in firm i is affected by either a permanent, but unexpected, change in the product market competition in period 1 or a permanent, but unexpected, change in the financial pressure the co-op faces. The fact that it is unexpected implies that it could not be taken into account when effort was decided in period 0. The fact that it is permanent implies that the worker will wish to adjust the effort choice made in period 1, once he has observed the change in period 1. It is also import- ant to note that both shocks are assumed to be specific to firm i. Therefore, I can take the potential output as given.
Consider first what happens to technical efficiency in period 1. Since the effort has already been decided in period 0 based on expected competition and financial pressure, I get:
(4.12) Next, consider period 2. After the change has been observed in period 1, it is incorporated in the expectations and the worker adjusts the effort choice to accommodate the new environment in period 2. The change in technical effi- ciency in period 2 following a change in product market competition is:
(4.13)
The intuition behind this result is quite simple. I know from above that the worker may want to readjust his effort so to counterbalance the negative effect of competition. Also, the decision of increasing effort will only have an impact on the next period’s profit-sharing bonus because of the time lag between the workers’ decision on effort and production. These re-adjustments have an impact on the co-op’s technical efficiency. As workers increase their effort in the first period, the actual output in period 2 increases and gets closer to the potential output. The result is that inefficiency in period 2 for the co-op reduces.
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Consider now the impact of a change in the financial pressure the firm is facing:
(4.14)
This result is not surprising. As credit constraints get less binding for the co-op, the workers are less willing to put more effort in the co-op and this has an adverse impact on its technical efficiency. On the other side, this implies that technical efficiency increases as financial constraints get tighter.
Finally, do financial pressure and product market competition work as com- plement or substitute mechanisms to improve a co-op’s technical efficiency?
Consider (4.13) and compute the second derivative with respect to the financial constraint. The sign is again positive as long as there are increasing returns to scale:
(4.15)
In other words, the impact of increasing product market competition on tech- nical efficiency will be larger in the presence of high debt pressure as long as the impact of an increase in effort on the level of production is quite large. This is not surprising: the impact on effort must be of such magnitude that it has to offset the impact of both increasing financial pressure and product market competition on efficiency.