A model of the free-entry producer cooperative

One of the most frequent criticisms of the Illyrian model of the labour-managed firm is that it does not take into account key institutional factors which are likely in practice to eliminate the perverse short-run supply and degeneration results well known in the literature. This paper presents a new model of the labour-managed firm, incorporating several of the most significant institutional factors actually in evidence in Western cooperative sectors. The free-entry producer cooperative model includes differing member and nonmember compensation methods, free access to membership, and special capital financing and shutdown rules. The new model's results differ from Ward's Illyrian firm model in a number of ways: first, capital is always variable for these firms, so the perverse short-run supply response does not apply; second, free-entry producer cooperatives do not degenerate into capitalist firms as Illyrian firms do; and third, such cooperatives will always have higher survival rates than both Illyrian and conventional firms.