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

This article introduces a new approach, cross-frontier analysis, for estima ting the relative efficiency of alternative organizational forms in an indu stry. The technique is illustrated by analyzing a sample of stock and mutua l property-liability insurers using nonparametric frontier efficiency metho ds. Cross-frontier analysis measures the relative efficiency of each organi zational form by computing the efficiency of each stock (mutual) firm relat ive to a reference set consisting of all mutual (stock) firms. We test agen cy-theoretic hypotheses about organizational form, including the managerial discretion and expense preference hypotheses. The results indicate that st ocks and mutuals are opera ting on separate production and cost frontiers a nd thus represent distinct technologies. Consistent with the managerial dis cretion hypothesis,the stock technology dominates the mutual technology for producing stock outputs and the mutual technology dominates the stock tech nology far producing mutual outputs. However, consistent with the expense p reference hypothesis, the stock cost frontier dominates the mutual cost fro ntier. Our findings thus suggest a richer interpretation of organizational form than provided by previous researchers.