Pathways to legitimacy among consumer loan providers in New York City, 1914-1934

Organization Studies, Spring, 1998 by David N. Barron

One of the distinctive features of sociological, as opposed to economic approaches to understanding the evolution of organizational forms is the central role sociologists accord to institutions. In the context of organizational ecology, this focus has typically involved investigating how the growing legitimacy of an organizational form affects the rate at which organizations of that type are founded and fail. Most research in this tradition has conceived of legitimacy as being essentially cognitive in nature (Hannan and Freeman 1989). An organizational form is legitimate to the extent that it becomes accepted by a group of people as the natural way to carry out certain collective acts. In other words, a legitimate organizational form is 'taken-for-granted'. Despite the strength of the empirical support for ecological models incorporating legitimacy in this way (Singh and Lumsden 1990; Hannan and Carroll 1992), there has also been much debate about the completeness of this conception of legitimacy (Carroll and Hannan 1989a; Carroll and Hannan 1989b; Zucker 1989; Baum and Powell 1995; Hannan and Carroll 1995; Hannan et al. 1995). Much of this controversy centres on two issues. First, ecologists have usually represented legitimacy as a function of the number of organizations currently operating which have a particular form - a variable known as density. There has been much debate about whether this is a suitable measure of cognitive legitimacy.

Second, although ecologists have tended to see legitimacy as cognitive, other scholars have considered it to imply moral or pragmatic acceptance of an organizational form (Suchman 1995). This point is related to the first, since it is often argued that density cannot measure all possible types of legitimacy, and that therefore other measures should be included in addition to density.

In this paper I explore both of these issues in the context of a study of the early history of two organizational forms: credit unions and Morris Plan Banks. I show how various mechanisms affected different types of legitimacy. Density, I argue, affects cognitive legitimacy. In addition, deliberate actions on the part of 'institutional entrepreneurs' (Powell 1991) helped to gain moral legitimacy for these organizational forms, and pragmatic legitimacy was increased by diffusion via the social networks of existing users of the organizations. Empirical analyses show that all three forms of legitimacy have independent effects on organizational vital rates. That is, including measures of legitimacy other than density does not undermine the density - dependence model, but it greatly enriches our understanding of processes that significantly impact on organizational founding, failure, and growth rates.

The analysis involves a study of the legitimation of credit unions and Morris Plan Banks. These organizations emerged early this century with the primary aim of providing small consumer loans to ordinary working people. The study of these organizations is of considerable sociological interest in its own right, since they were among the first non-philanthropic organizational forms to legally provide consumer loans. They also radically changed the practice of consumer lending by not requiring any form of collateral for their small loans, and by allowing repayment by installments. As several classic sociological works have pointed out (Weber 1927; Simmel 1978), the development of new forms of credit is of major sociological importance because it opens up a completely new set of possible exchange relations.

This paper uses both quantitative and qualitative methods. Ecological analyses have typically relied on quantitative analyses of organizational founding, failure, and growth rates over long periods. Quantitative analyses can suffer from several drawbacks. First, when one wants to focus on particular periods in the development of an organizational form, as in the research reported here, the relatively small number of observations available limits statistical power. Second, it is particularly difficult to study organizations that were not numerous. The Morris Plan Bank of New York is an example of such an organization: competing for business only in New York City, there was only one such organization within the city.

Historical sources add richness to an analysis, and provide an alternative means of analyzing the impact of variables that are difficult to measure quantitatively. Quantitative analysis also has advantages, however. It allows the use of the powerful models and methods developed by organizational ecologists, and simplifies comparisons with prior research. I therefore use both quantitative and qualitative analyses.

The paper is organized as follows. First, in the theoretical section, the mechanisms by which credit unions and the Morris Plan Bank of New York achieved moral, cognitive and pragmatic legitimacy are described. Second, the results of a quantitative investigation of credit union founding rates and Morris Plan Bank growth rates are discussed. Third, historical evidence is introduced that supports and further illuminates the results obtained from the quantitative analyses. Finally, I draw conclusions from these studies, and suggest how one could build on these findings in the future.