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.