Random capital service in labor-managed and profit-maximizing firms

The labor-managed firm and the profit-maximizing firm may experience random production due to a variety of fundamental sources of uncertainty. This paper demonstrates that the nature of the source of uncertainty leads to alternative specifications of the problem and to different conclusions. The specific source of uncertainty modeled in this presentation is random capital failure in the labor-managed firm and in the profit-maximizing firm. In each case, the choice of primary capital, reserve capital, and labor is considered.     

Strategic commitment and Cournot competition with labor-managed and profit-maximizing firms

This paper examines the behavior of a labor-managed income-per-member-maximizing firm and a profit-maximizing firm in a quantity-setting model with a strategic commitment. First, each firm independently decides whether or not to make a commitment to capacity. This capacity may subsequently be increased, but cannot be decreased. Hence, each firm’s investment choice changes its capital cost from a variable one into a fixed one. Second, each firm independently chooses its actual output. The paper examines the equilibrium of the quantity-setting mixed model and shows whether or not capacity investment is effective for the labor-managed firm and the profit-maximizing firm.     

Basque versus Illyrian labor-managed firms: The problem of property rights

The property-rights structure of the “Basque” firm, directly derived from Mondragon industrial cooperatives, is discussed in this paper which focuses on two prominent characteristics: the “capital accounts” and the collective reserve fund. It is shown that the Basque firm, although it does not allow membership rights to be traded, is in a better position than the Illyrian firm to cope with problems of weak property rights, in particular the lack of personal commitment and incorrect incentives for both the admission of new members and investment.     

On the theory of the competitive labor-managed firm under price uncertainty

The short-run behavior of a labor-managed firm under competitive assumptions and price uncertainty is analyzed assuming risk aversion. It is compared with its behavior under certainty and the behavior of a capitalist-managed firm under price uncertainty. It is shown that a risk-averse labor-managed firm employs more labor than a risk-neutral labor-managed firm. Generally, uncertainty is seen to have greater impact on the behavior of a labor-managed firm than on the behavior of a capitalist-managed firm. Except under constant risk aversion, the behavior of a labor-managed firm under price uncertainty is less predictable than that of a capitalist-managed firm.     

More on alternative objectives of labor-managed firms

This paper focuses on an alternative theory of a labor-managed firm where the main behavioral assumption is profit per laborer maximization subject to an employment constraint, or, alternatively, employment maximization subject to a profit per laborer constraint. This theory and its implications are derived employing a standard duality approach. The results are then compared with those obtained in the theory of the traditional labor-managed firm which maximizes profit per laborer.     

The effect of production uncertainty on the labor-managed firm

The effects of production uncertainty on the behavior of the labor-managed, cooperative firm are examined and it is shown that they generally differ from the case of certainty and the case of the entrepreneurial, profit-maximizing firm. In particular, it is shown that the risk-averse (risk-seeking) cooperative will have a larger (smaller) ratio of labor to nonlabor input employed in production than the risk-neutral cooperative.     

Horizon problems and property rights in labor-managed firms

The Furubotn-Pejovich horizon problem arises from the lack of any recoupable claim on the equity in Yugoslav-type social-property LMFs. This problem has been solved by the system of internal capital accounts of the Mondragon-type individual-equity LMFs. The worker's profit rights are contingent on working in a LMF, so a Jensen-Meckling-type residual horizon problem might remain even in an individual-equity LMF. But property-theoretic analysis shows that the basic difference with a capitalist firm lies in contractual opportunities, not property rights. Capitalist owners may hire future workers; members of a LMF may not.     

Information and incentives in labor-managed economies

The incentive problems that result in labor-managed economies from attempting to eliminate the inefficient allocation of labor due to this institutional arrangement are discussed. Games are searched for such that, at an equilibrium, firms have revealed truthful information and labor is allocated efficiently. It is shown that such games do not exist if output is not observable, and even if aggregate deficits or surpluses are permitted. By contrast, if output is observable, balanced games exist in which it is dominant strategy for each firm to be truthful.     

Optimal development programs under uncertainty: The undiscounted case

One considers a many-commodity world where technology depends on an exogenous environment whose successive states form a stationary Markov process. A program is optimal if it overtakes any other program or has the maximum expected utility.It is shown there exists a best stationary program. One proves then there exists an optimal program, which converges asymptotically to the best stationary program, and is generated by a policy such that, at every date, a nonrandom production decision is chosen which depends only on the state of the world and of the economy at that time.     

Risk preferences estimation of exporting firms under exchange rate uncertainty

This note empirically analyses how exchange rate fluctuations affects firms’ optimal production and exporting decisions. A firm’s elasticity of risk aversion determines the direction of the impact of exchange rate risk on exports. Based on a flexible utility function that incorporates all possible risk preferences, a unique structurally estimable equation is derived. Quantile regression method is used to estimate this equation and compute the risk aversion elasticities for a panel of Indian firms. This approach allows us to demonstrate how characteristics of exporters at the intensive margin varies with the level of elasticities across the conditional exchange rate distribution.     

Search,selection, and shortage in an industry composed of labor-managed firms

Evolutionary models of an industry composed of labor-managed firms are constructed. In these models, search or selection processes—in the sense of Nelson and Winter—determine what production techniques are used. If certain types of subsidies are introduced into these models, shortage—in the sense of Kornai—results. How search and selection processes promote use of cost-minimizing techniques and how subsidies may stifle or deflect these processes is investigated through ten propositions. These propositions are applied to illuminate Yugoslavia's slow adjustment to increases in the relative price of oil.     

The welfare implications of resource allocation policies under uncertainty: The case of public education spending

In this paper, we examine whether policy interventions, aimed at improving resource allocation, also have important stabilization effects over the business cycle. To this end, we employ a dynamic stochastic general equilibrium model in which public education expenditures, financed by distorting taxes, enhance the productivity of private education choices. We then calculate the welfare implications of competing operating targets using a state-contingent instrument rule for public education spending. Our main findings are: (i) there can be important cyclical effects of different resource allocation policies depending on the operating target used and the degree of macroeconomic uncertainty; (ii) it is important to use an operating target which is as close as possible to the heart of the market imperfection that justifies policy action; (iii) policy action should not be monotonic in the degree of macroeconomic uncertainty.     

Optimal risk shifting vs efficient employment in Illyria: The labor-managed firm under asymmetric information

Using an optimal contract framework, the recent literature showed how labor-managed firms (LMFs) can reach efficient employment, internal risk sharing, and risk shifting to outside investors if all information is public. This paper analyzes the LMF under asymmetric information between members and investors. Sections 2 and 3 explore one-period arrangements in a way which parallels the recent work on optimal wage-employment contracts in capitalist firms. Our main result is that, contrary to the Coase theorem, the two specifications of property rights entail different allocations of risk and employment. Section 4 shows how long-term arrangements ease the conflict between optimal employment and risk shifting.     

Why governments sell public firms: The Spanish case

This paper compares the goals that the successive Spanish governments have actually pursued (as deduced from the set of privatizations carried out over the last fifteen years) with the standard hypotheses used in economic literature to explain privatization in general. The results show that the cash-collecting goal appears as the relevant explanatory hypotheses for most of the privatizations carried out. Also, all of the state-owned firms that operated under monopoly conditions have actually been privatized but retain, at least partially, their monopoly position (they involve activities where natural monopoly features are present). This has led to establishing new regulatory rules (reregulation) and that privatization, per se, has not resulted in substantial improvements in competition.An earlier version of this paper was presented at the Forty-Eighth International Atlantic Economic Conference, October 7–10, 1999, Montreal, Canada.     

The financing of small innovative firms: the Italian case

Small firms encounter difficulties in collecting external finance due to greater information problems. For small innovative firms, whose activity is more difficult to evaluate, the cost of external finance could be even higher. This paper aims to shed light on special features in financial structures of small innovative firms, compared with firms of similar size that do not innovate. The evidence shows that small innovators rely less on financial debts and more on internal financial resources; no important differences appear for large firms. This is consistent with the view that information problems mainly affect small firms. Another finding is that small innovative firms show a lower investment sensitivity to cash flow than small non-innovative firms: it is likely that the high incidence of internal financial resources allows them more flexibility in deciding their investments. No difference in investment sensitivity to cash flow, by innovative attitude, is found for large firms.     

The socialist labor-managed firm and bank-financed investment: Some theoretical issues

Under a labor-managed system of the Yugoslav type of 1965–1971, the process of capital formation is subject to special difficulties, linked to the structure of property rights. Workers possess neither permanent nor transferable claims on capital assets but are, nevertheless, required by law to maintain the value of the firm's initial capital stock and of any additions to it. The law is intended to protect the nation's capital stock but is ill designed for this purpose. Its immediate effect is to reduce the collective's willingness to undertake bank-financed investment, and thus it promotes inefficient intertemporal allocation.