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THEORIES OF CO-OPERATIVES
PRESENTED BY
SIMRAN KAUR
MBA2ND YEAR
IGICM
ECONOMIC THEORY OF COOPERATIVES• Important elements of economy and society• Theory given by Faulkner and DeRond• Represents conceptual foundation applied to address the
research question• Set of related statements about how members, directors,
and employees would behave and achieve given assumptions about their objectives and resources• Raise information, communication and learning issues• Describe impact of cost or other efficiency criteria to
coordinate economic agents
TYPES OF ECONOMIC THEORY OF CO-OPERATIVES1. Agency Theory
2. Theory of Contracts
3. Transaction Cost Economics Theory
4. Game Theory
AGENCY THEORY• Compare what happens when a business is owned and managed
by the same person and when the business is owned by one person and managed by another whom one can call the agent• Explains relationship between principals and agents in business• Resolving problems that can exist in agency relationships• Main focus is on incentive and measurement problems• Two problems that agency theory addresses are:
1. When desires or goals of the principal and agent are in conflict
2. When principal and agent have different attitudes towards risk
CONCEPTS OF AGENCY THEORY• Agent is employed by a principal to carry-out a task on
their behalf• Agency refers to the relationship between principal and
agent• Agency costs are incurred by principals in monitoring
agency behavior• An agent becomes accountable to the principal by
whom they are employed
CHARACTERISTICS OF AGENCY THEORY• Two acting parties, namely the agent and the principal• Delegation of property rights by the principal to the
agent• Conflicting interests between both parties arising due
to maximization of their individual utility• Choice of some action under uncertainty by the agent,
which influences utility of principal• Informational asymmetry
CRITICISMS OF AGENCY THEORY• Focus on individual• Individualistic behavior• Contracts have to be adaptable• Neglecting ethical aspects• Ignoring distrust development of agents• Disregarding of principal’s obligation towards agent
THEORY OF CONTRACTS• Study of how individuals and businesses construct and
develop legal agreements• Draws upon principles of financial and economic behaviour• Conflict of interest between the parties and asymmetric
information• Extension of price theory in the following sense• Subset of Game theory• Seeks to understand organizations, institutions and
relationships between productive individuals when there are differences in personal objectives
TYPES OF THEORY OF CONTRACTS• OBJECTIVE THEORY OF CONTRACTContract is not an agreement in the sense of a subjective
meeting of mindsExistence of contract determined by legal significance of
external acts of a party to a purported agreement• SUBJECTIVE THEORY OF CONTRACTAgreement in which the parties have a subjective meeting of
mindsRoundly rejected by courts and commentators, in favor of
the objective
FORMS OF CONTRACTS• HIDDEN ACTIONUncertainty is exogenous and affects the agent’s performances Agent’s action is costly to himself but benefits the principalPrincipal designs contract based on observable outcome• HIDDEN INFORMATION PARADIGMAgent’s actions are observableUncertainty may be exogenous as well as endogenousAgent obtains perfect information by which feasible sharing
rules are derived
FORMS OF CONTRACTS(CONTD.)• CONTRACTUAL INCOMPLETENESSIncomplete contract theory suggests main concern to
consider limitations of contracts that fail to specify investment levels
Reasons of incomplete contract
i. Unforeseen contingencies
ii. Cost of writing contracts
iii. Cost of enforcing contracts
TRANSACTION COST ECONOMICS THEORY(TCE)• Organization of transactions that occur whenever a
good or service is transferred from a provider to user across a technologically separable interface• Understands firm as a hierarchy which allocates
productive resources by command• Developed by Coase in seminal paper• Effort to identify, explicate and mitigate contractual
hazards
CHARACTERISTICS OF TCE• Bounded rationality• Opportunistic behavior• Asset specificity• Uncertainty• Frequency
TYPES OF TRANSACTION COSTS• Search and information costs• Bargaining costs• Policing and enforcement costs
APPLICATIONS OF TCE• Credible commitments• Governance trade-off• New theory of incomplete contracting
CRITICISMS OF TCE• Focuses on cost minimization• Understands cost of organizing• Neglects role of social relationship in economic
transactions
GAME THEORY• Study of strategic decision making• Study of mathematical models of conflict and cooperation between
intelligent rational decision makers• Mainly used in economics, political science, psychology, as well as
logic and biology• Applied during situations in which decision-makers must take into
account the reasoning of other decision makers• Cooperative game theory studies frictionless bargaining among
rational players who can make binding agreements about how to play a game• Cooperative game theory applies both to zero-sum and non-zero-sum
games
GAME• Contest involving two or more decision-makers, each of
whom wants to win• Represents conflicting situations• Predetermined rules• Some games have transferable utility• For other games, utility is non-transferrable
CHARACTERISTICS OF GAME• Finite• Series of plans• Conflict of interests• Well known• Choices• Outcome
COMPETITIVE SITUATIONS IN GAME• Situation where there are two or more opposite parties
with conflicting interests and action of one depends upon the action that opponent takes• Situation of decision making under uncertainty• 3 categories
1. Decision-making under certainty
2. Decision-making under risk
3. Decision-making under uncertainty
ELEMENTS OF GAME• Players• Actions• Information• Strategies• Outcomes• Pay-off• Equilibrium
TERMINOLOGY OF GAME• Sum of gains and losses• Number of players• Number of activities• Number of alternative available to each person• Payoff(quantitative measure of satisfaction a person
gets at the end of the play)• Fair game• Saddle point(smallest value in row and largest value in
its column)
STRATEGIES OF GAME• Strategy is list of all possible action that he will take for
every pay-off • Assumption of rules governing the choices are known in
advance to the players• Particular strategy by which player optimizes his gains or
losses without knowing the competitor’s strategies is called optimal strategy• Expected outcome per play when players follow their
optimal strategy is called value of game• Types of strategies: pure and mixed
PURE STRATEGY• Decision rule always used by the player to select
particular course of action• Pre-determined course of action to be employed by the
player• Opponent is sure of the course of action• Objective of the players is to maximize gains or
minimize losses
MIXED STRATEGY• Player is using more than one strategy• Player decide his course of action• Opponent can’t be sure of the course of action• Objective of players is to maximize expected gains or to
minimize expected costs or to minimize losses by making solution among pure strategies with fixed probability
ASSUMPTIONS OF GAME• Each player has finite set of possible courses of actions
or strategies• Number of participants is known• Players attempt to maximize gains and minimize losses• Players adopt individual decisions without any direct
communication• Player ‘A’ gains or Player ‘B’ loses and vice versa• Players are intelligent and rational
ASSUMPTIONS OF GAME(CONTD.)• Each player makes individual decision• Participants of game have a perfect knowledge of game• Decision of game can be positive, negative or zero or
either of these to each participant• Pay-offs are predetermined in reaction to different
courses of players• Set of rules according to which pay-off will be
determined• Gain or loss of each player is finite and is fixed before
the game
ADVANTAGES OF GAME THEORY• Gives insight into several less-known aspects• Develops a framework for analyzing decision making
where interdependence of firms is considered• At least in two-person zero-sum games, game theory
outlines a scientific quantitative technique to arrive at an optimal strategy
LIMITATIONS OF GAME THEORY• Assumes each firm has knowledge of strategies of the
other• Assumption of maximin and minimax• Various strategies lead to endless chain• Analysis becomes elaborated to three or four persons
game• Use of mixed strategies for making non-zero sum games
determinant is unlikely to be found
APPLICATION OF GAME THEORY• Political Science• Economics and business• Biology• Computer science and logic
WELFARE ECONOMICS• Branch which is primarily concern with promotion of
welfare of community as measured in satisfaction derived from consumption of goods and services at the disposal of community• Term welfare in economics is health, happiness and
fortune of person or group• According to Alfred Marshall,” The economist, like
everyone else, must concern himself with the ultimate aims of man.”• Think on the line of maximizing the human happiness
without making others to suffer
HISTORY OF WELFARE ECONOMICS1. Neoclassical welfare economics• First developed in late 19th and early 20th centuries• Leading figures were Edgeworth, Sidgwick, Marshall and Pigou
2. New welfare economics• Leading figures were Pareto, Hicks and Kaldor• Uses ordinal utility• In 1940s
3. Happiness economics• Welfare of overall wealth and GDP• Richard Easterlin is the modern forefather• In 1970s
SCOPE OF WELFARE ECONOMICS• Economic and non-economic welfare• Both positive as well as normative study• Individual welfare as well as social welfare
IMPORTANCE OF WELFARE ECONOMICS• Pricing• Trade policy on international trade• Policy regarding monopoly vs competition• Taxation policy• National income• Socialist ideology
PARETO’S ANALYSIS OF WELFARE ECONOMICS• Vilifredo Pareto, an Italian economist, founder of new welfare
economist• Pareto’s analysis is called paretein optimum• Pareto formula
1. If everyone in the society is indifferent between two alternative social situations X and Y, then society should be indifferent too
2. If atleast one individual strictly prefers X to Y, and every other individual regards X to be atleast as good as Y, then society should prefer X to Y
3. Pareto optimality is in a given choice situation, consider set of alternatives X from which choice should have to be made
PARETIAN OPTIMALITY CONDITIONS• Optimum allocation of products• Optimum degree of specialization• Optimum factor utilization• Optimum allocation of factors of product among various
uses• Optimum direction of production• Optimum allocation offactor
SOCIAL WELFARE FUNCTION• Mapping from allocations of goods or rights among
people to the real numbers• Describe preferences of an individual over social states• Complete and consistent ranking of social states• If the social welfare ordering is continuous, it can be
translated into a social welfare function• Function f(U1,U2) of utility levels of all (both)
households such that a higher value of function is preferred to a lower one. This function is called Bergsonian welfare function
PROPERTIES OF SOCIAL WELFARE FUNCTION• Assumed to satisfy welfarism which means social
welfare depends only on utility levels of the household• Assumed to be increasing in each household’s utility
level(ceteris paribus)• Intensity of trade-off is usually assumed to depend on
degree of inequality
SOCIAL WELFARE INDIFFERENCE CURVES
CO-OPERATIVES• Serving the society and members also• Model of enterprise relevant in difficult economic times
and instances of market failures• Promote and support entrepreneurial development• Create productivity employment, raising incomes and
help to reduce poverty
COOPERATIVES IN WELFARE ECONOMICS• Agricultural cooperatives• Child-care cooperatives• Credit unions• Worker co-operatives• Utility co-operatives• Insurance co-operatives
THANK YOU!!!