Endogenous Formation of Coops and Cooperative Leagues

The labor-managed Mondragon cooperatives in the Basque country, and La Lega coops concentrated in North Central Italy, are grouped into leagues that enable them to reap economies of scale in key services such as R&D, marketing and finance. These leagues are relatively rare and there are fewer than a dozen of them globally. We develop a game- theoretic model of league formation to capture some of the strategic incentives behind the formation of labor-managed cooperatives (coops) and their agglomeration into a league. We then compare these incentives with those of conventional profit-maximizing firms to organize into a league. The main result of this paper shows that a divergence in these incentives stemming from their organizational differences may lead to the formation of a league of firms but not one of coops. This turns out to be true even though the coop has lower costs of production and the existence of a coop league would have been socially efficient. Anticipating the non-existence of a coop league then creates a disincentive for individual agents to form coops in the first place. This explains the relative rarity of coops, competing individually or as a part of a league, with conventional firms in imperfect markets