A Theory of Co-operatives Based on Rights

Thomas H. Noe

and Stephen D. Smith

We investigate the role of cooperatives in the allocation of risk across agents that we call workers and holders of capital. We show that, despite the inalienability of human capital (no forced labor) and limited liability on the part of all agents, financial coalitions can implement Pareto optimal inter temporal risk sharing services for both workers and holders of capital. We specifically show how optimality can be achieved in textit (worker preferred) equiliria if individual holders of capital collectivize and jointly hire workers, who are paid wages depending on the aggregate output of the coalition. Interestingly, we also provide an example where textit (capital
preferred) equilibria do not provide for optimal risk sharing and re-negotiation proofness.