Organizational form and efficiency: The coexistence of stock and mutual property-liability insurers

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 opera ting 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 far 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.