Free-riding on product quality in cooperatives: Lessons from an experiment

Olivier Bonroy, Alexis Garapin, Stephen Hamilton and Diogo Souza-Monteiro
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Diogo Souza-Monteiro: Newcastle University [Newcastle], School of Natural and Environmental Sciences - Newcastle University [Newcastle]
Authors registered in the RePEc Author Service: Diogo Monjardino de Souza Monteiro ()

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Abstract: An important issue facing marketing cooperatives is that the overall quality of the product depends on the quality of farm products provided by individual members. We conduct an experiment to empirically investigate producer incentives to free-ride on quality among the members of a marketing cooperative in a setting where the average quality provided by cooperative members results in a collective rent that is distributed back to members in a patronage dividend levied in proportion to the quantity produced. Hidden actions by cooperative members that impact quality are imperfectly monitored, but free-riding, when detected, results in exclusion from cooperative returns. The randomized payoff structure of our game results in a novel experimental design that nests public good games and multi-player assurance games. Our findings indicate that free-riding on product quality is deterred when (a) cooperatives base patronage dividends on quality outcomes of smaller groups; (b) payoffs from free-riding are randomized by the possibility of exclusion from cooperative returns; and (c) cooperatives distribute a larger share of returns to members through indirect payments such as capital pooling and cost-sharing arrangements unrelated to product quality.

Keywords: agricultural cooperatives; product quality; farm product; free riding (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (7)

Published in American Journal of Agricultural Economics, 2019, 101 (1 - January), pp.89-108. ⟨10.1093/ajae/aay025⟩

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Journal Article: Free-riding on Product Quality in Cooperatives: Lessons from an Experiment (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01767655

DOI: 10.1093/ajae/aay025

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