Abstract
Hart and Holmstrom (2010) claim that organizational form conditions a sense of entitlement. In turn this may create feelings of being aggrieved by contractual outcomes resulting in shading activities and deadweight losses. If shading depends positively on existing payoff imbalances between bosses and managers, our model predicts that (non)integration with coordination is more plausible when profits of bosses and benefits of managers are (dis)similar. Given plausible parameter constraints, we illustrate how both organizational forms, an integrated cooperative and a nonintegrated private firm may coexist in a coordinated equilibrium and how cooperatives may obtain a higher social surplus. Empirically, we study cooperatives in Northern Italy and how they compete with private wineries regarding product quality and collective reputation. We show that cooperatives may obtain higher levels of social welfare through a collective reputation and/or a price premium for quality relative to private wineries.