23 – The accumulation of Capital in Labour-Managed Firms: Divisible Reserves and Bonds

The problem of the accumulation of capital in labor-managed firms and worker cooperatives has being attracting considerable attention among researchers. The Furubotn-Pejovich effect is considered to be the source of undercapitalization. The paper seeks to show that the presence of undercapitalization is due to a specific form of reinvestment, i.e. the reinvestment of selffinanced capital funds in indivisible reserves. The introduction of divisible reserves appropriable by worker-members at some point in time would be a valid measure with which to counteract the horizon problem and undercapitalization. However, in the formulation given to it by this paper, it engenders less widely-explored problems connected with the way in which net surpluses are distributed and reinvested, and with the reimbursement of individual capital quotas. When divisible reserves are present, cooperative bonds can be introduced to deal with the shortcomings due to capital variability and allow a better match to be achieved between the members’ and the firm’s objectives. Members can cash in their individual capital stake by selling it, while the firm does not immediately have to reimburse members’ quotas. However, the creation of a market for cooperative bonds is likely to generate risks of its own that again must be tackled appropriately. A minimum level of indivisible reserves will still be needed in order to stabilize the capital structure of the firm. The quota of the firm capital saleable in the form of cooperative bonds should be restricted. The sum of divisible reserves owned by incumbent members, and of indivisible reserves owned by the cooperative, should constitute a substantial part of its capital. Finally, a hierarchy of liabilities is required which prioritizes the reimbursement of debts owned by parties who undergo information disadvantages.

Keywords: undercapitalization, net residual, divisible reserves, cooperative bonds, hierarchy
of liabilities.
JEL classification: G31, J54, P51