Behavior and the organization of the firm

In this paper a new way of distinguishing between cooperative and noncooperative organizations is introduced. This distinction is based on well-known solution concepts and is applied to the problem of organizing production teams in a firm. My first result demonstrates that income-sharing cooperative firms are not necessarily inefficient, as suggested in the works of Alchian and Demsetz (Amer. Econom. Rev. 62, 777-795, 1972) and Holmström (Bell. J. Econom. 113, 324-340, 1982). Second, it is shown that if a capitalist firm is interpreted as a noncooperative organization, then it must be less efficient than corresponding cooperative organizations due to the additional monitoring of workers needed to stop shirking. Finally, an informal discussion is presented explaining why, despite their apparent advantages, more cooperative firms are not observed in practice.