Price Uncertainty and the Labor Managed Firm

Since the seminal work of Ward [19] on the pure model of a labor managed firm (LMF), a number of authors have extended the theory of the cooperative firm. Initially, the literature focused on the theory of the LMF under certainty. Domar [4] analyzed the behavior of a multiproduct LMF, while Vanek [18] and Estrin [6] investigated a general theory of labor managed market economies. Maurice and Ferguson [14] and Bonin and Fukuda [3] analyzed input decisions of the LMF in a multifactor framework, and Furubotn [7], Berman and Berman [1], and Estrin [5] extended the theory to long run equilibrium. Recently, Muzondo [15], Bonin [2], Paroush and Kahana [16], Hey and Suckling [9] and Hey [8] investigated the effects of output price uncertainty on the LMF that uses a single input, labor. There is an emerging consensus on three fundamental aspects of the theory of the LMF under output price uncertainty. First, Ward's result that the cooperative has a downward sloping supply curve is robust under price uncertainty. For example, Paroush and Kahana demonstrated that the cooperative has a perverse response; that is, an increase in mean output price decreases labor employment and output supply. This result was confirmed by Bonin and by Hey and Suckling. Second, in contrast to the risk averse competitive profit maximizing firm, Muzondo [15, 133] demonstrated that the risk averse LMF with a single variable input, labor, "employs more labor and produces more output than a risk neutral LM firm." ' Paroush and Kahana [16, 213] have also found that the "cooperative firm, even if risk averse, produces more and increases its demand for labor than its certainty equivalent twin."2 Horowitz [10] argued that a risk averse LMF uses more labor and produces more output than does a risk neutral LMF even in the n -factor case.3