Document Type

Article

Publication Date

2014

Abstract

Some of the most recognizable companies, including Land O'Lakes, REI, the Associated Press, Ace Hardware, and State Farm Insurance, are organized as cooperatives--firms owned by their suppliers, workers, or customers. Yet aside from isolated areas of the economy, cooperatives constitute only a small portion of American enterprise, which is otherwise dominated by investor-owned firms. Conventional wisdom assumes that firms either start as cooperatives or convert to cooperatives when cooperatives offer the highest ongoing benefits to owners, and it explains the lack of cooperatives by suggesting that cooperatives usually do not maximize ongoing benefits. This Article looks at entrepreneurs' and brokers' actions when starting or converting firms. It finds that the conventional assumption is often violated. Starting a cooperative is similar to supplying a public good, and just as unsubsidized public goods are underprovided, so too are unsubsidized cooperative starts. Additionally, a lack of viable brokering institutions prevents most existing firms from converting to cooperatives even when cooperatives promise the highest ongoing benefits. These findings explain cooperatives' low market share and several empirical observations that are inconsistent with the conventional wisdom. The results suggest social welfare could be improved if cooperatives were subsidized, through favorable tax treatment, grants, or regulatory intervention like ABA rules requiring law firms to be owned by lawyers. They also question the shareholder primacy model of corporate governance. The Article closes by briefly considering the Affordable Care Act's current $2 billion subsidization of health insurance cooperatives.

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