Technology, Effort, and the Relative Efficiency of Organizations*

In this paper we explore how the modeling of effort as a factor of production affects the relative competitiveness of different economic organizations. We construct a simple model of privately-owned and labor-managed firms to show that the more important the role of effort in production, the greater the differences in the efficiency of the two types of firms even if monitoring is held fixed. Using data on cooperative and private farms in El Salvador, we show much greater differences in efficiency between cooperatives and private farms for coffee, an effort-intensive crop, than for maize and sugar, which are less effort intensive. In all cases, private farms elicit higher levels of effort than do cooperative farms. The results suggest that the way in which effort enters the production function may determine the number of organizational forms that can coexist in a competitive industry.