Organizational Form and Efficiency: The Coexistence of Stock and Mutual Property-Liability Insurers

TLDR

The study develops a cross‑frontier analysis framework to compare the relative efficiency of stock versus mutual property‑liability insurers and tests agency‑theoretic hypotheses about organizational form. Using nonparametric frontier efficiency methods, the authors compute each firm’s efficiency relative to a reference set of the opposite organizational form, illustrating the approach with a sample of stock and mutual insurers. Results show that stock and mutual insurers operate on distinct production and cost frontiers, with stock technology dominating mutual for stock outputs, mutual technology dominating stock for mutual outputs, and the stock cost frontier surpassing the mutual cost frontier, indicating a more nuanced view of organizational form.

Abstract

This article introduces a new approach, cross-frontier analysis, for estimating the relative efficiency of alternative organizational forms in an industry. The technique is illustrated by analyzing a sample of stock and mutual property-liability insurers using nonparametric frontier efficiency methods. Cross-frontier analysis measures the relative efficiency of each organizational form by computing the efficiency of each stock (mutual) firm relative to a reference set consisting of all mutual (stock) firms. We test agency-theoretic hypotheses about organizational form, including the managerial discretion and expense preference hypotheses. The results indicate that stocks and mutuals are operating on separate production and cost frontiers and thus represent distinct technologies. Consistent with the managerial discretion hypothesis, the stock technology dominates the mutual technology for producing stock outputs and the mutual technology dominates the stock technology for producing mutual outputs. However, consistent with the expense preference hypothesis, the stock cost frontier dominates the mutual cost frontier. Our findings thus suggest a richer interpretation of organizational form than provided by previous researchers.