A Theory of the Labor-Managed Firm Embedded in Popular Culture

This article develops a (partial equilibrium) microeconomic theory of popular-economy organizations (PEOs). Motivated by empirical data on PEOs in Santiago de Chile, we show that they are labor-managed firms (LMFs) embedded in dense social networks where cooperation between worker-members plays a central role. Starting from LMF models where worker-members share the risk of layoffs, we introduce the role of cooperation and possible dimensions of embeddedness (compensations of laid-off members, absence of two-tier contracts, permanent membership) in a static and a dynamic framework. We take advantage of the close connection between the representation of the LMF and the literature on efficient contracts in unionized capital-managed firms. We compare our results with traditional LMFs and profit-maximizing firms (PMFs) models.