Agents Monitoring Their Manager: A Hard‐Times Theory of Producer Cooperation

We model the producer cooperative as a firm where a single class of individuals supplies an essential input and monitors managerial behavior. We show how this contractual structure reduces the incidence of equilibrium credit rationing, even assuming a cost disadvantage relative to a firm where these roles are specialized. Our model provides an explanation for producer and worker buyouts in the face of exit by investor owners, and, more generally, for cooperative entry in low‐return economic environments not serviced by investor‐financed firms. Further, our model predicts that a cooperative firm is less prone to monitor‐manager collusion, and that it monitors excessively in high‐return environments.