Cooperative Formation and Financial Contracting in Agricultural Markets

Brent Hueth, Philippe Marcoul and Roger G. Ginder

No 18610, Hebrew University of Jerusalem Archive from Hebrew University of Jerusalem

Abstract: Cooperative formation in agriculture sometimes occurs in response to the exit of a private firm and typically requires substantial equity investment by participating farmers. What economic rationale can explain why farmers are willing to contribute capital to an activity that fails to attract non-farm, or "private" investment? We hypothesize that doing so is a costly mechanism for increasing the maximum penalty farmers face in the case of business failure. For a given market environment, exposing farmers to this risk increases the amount of surplus that can be used to repay lenders, thus expanding the set of market environments in which financing is available. We show how equity investment of this sort can be an efficient organizational response to a reduction in expected markets returns and interpret the resulting financial contract as a "cooperative."

Keywords: Agribusiness; Marketing (search for similar items in EconPapers)
Pages: 26
Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:ags:hebarc:18610

DOI: 10.22004/ag.econ.18610

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