Managing Contractual Risk Through Organization: Strategic Vs. Consensual Networks
47 Pages Posted: 6 Oct 2004
Date Written: May 2004
Abstract
This paper presents a study of the economic organization of systems of financial cooperatives (FC). The first part is a theoretical framework rooted in principles of transaction cost economics that seeks to explain empirical regularities observable in systems of FC worldwide. The second part is an empirical analysis that compares the Quebec Desjardins Movement (DM) and the Ontario Credit Union (OCU) system that are both organized as networks with different degree of development. The fundamental proposition is that networks, particularly strategic networks, are a superior form of governance mechanism for relatively wide ranges of contractual hazard and size of institutions. Strategic networks provide a substitute control mechanism when the size of the institution dilutes internal governance mechanisms. It thus discourages subgoal pursuits and expense preferences, and possibly economizes on bounded rationality both occurring in large FC. The theory allows us to generate a set of testable hypotheses of which three are tested in the paper, namely: i). Over a range of small FC, differences in efficiency will be relatively small, if any. ii). Large independent institutions should display systematically lower efficiency than similar sized FC members of strategic networks. iii). FC in strategic networks should display lower variance in size as well as in performance indicators. Our empirical results are consistent with these theoretical propositions. Opponents to networks often argued that the benefits associated to the vast array of financial services offered to large sectors of the population, and in particular to rural communities, come at a heavy price of running an expensive bureaucracy. Our data suggest that the success of the DM in servicing its vast and rural clientele effectively comes at a price. But, even paying this price, the DM outperforms the OCU system.
Keywords: Transaction cost economics, financial cooperatives, networks, corporate governance, technical efficiency, X-Efficiency
JEL Classification: G2, G3
Suggested Citation: Suggested Citation
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