Problem set 3: Capitalists VS Coops

We assume: *Both max income *Both are egalitarian *Neither have influence on productivity *Large number of heterogeneous firms *Free entry for less efficient firms *Industry small relative to aggregate economy

Capitalist firms: Two types of firms, differs only in relative efficiency: Price is a function of the aggregate prod in the industry. (Exogenous) Profit max yields: (**) Free entry implies that zero profit is earned by the marginal unit in prod for less efficient firm.

Worker owned: Max problem for Coops FOC: Because of free entry this means that:

a)Price and output do not change. Why? Follows from free entry and exogenous wage=r. b) Will not change. Why? Because both firms will produce until marginal product = r. c)go down? Why? We show this by total diff. (*) and (**) What we get is.

We see that workers in coops will reduce their employment if they are more efficient than other firms. Workers in efficient firms in coop will better off than workers in capitalist firms, because they can employ fewer workers (they need less people to pay the fixed costs). But if they have to fully compensate prior capitalist owners, they will have to pay all the future rents that the capitalist firm would earn. To manage this they must adapt their level of employment, and all the rent they earn will be paid back to the former owners. The workers will then end up in a situation where they are indifferent between working in a coop and being employed in a capitalist firm.

2) A capitalist taking over and fully compensating the owners of a coop is profitable because the stream of future income of the coop members, when max profit per member, is lower than the stream of future income to the capitalist, when they max profit. Hence the capitalist can afford to compensate owners and still earn pure profit.

3) If this description is true we would expect to see a decline in the number of coops, and an increase in number of capitalist firms. However it is possible that coops could be more efficient than traditional firms. Coops: -they care more about their job -they need less supervision -they take better care of physical capital -they work more hours -positive externalities with a team pulling in the same direction. Capitalist: -efficiency wage -also have team effects