Cooperative Formation and Financial Contracting in Agricultural Markets
AbstractCooperative 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, "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 market returns and interpret the resulting financial contract as a "cooperative."
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Bibliographic InfoPaper provided by Center for Agricultural and Rural Development (CARD) at Iowa State University in its series Center for Agricultural and Rural Development (CARD) Publications with number 03-wp349.
Date of creation: Oct 2004
Date of revision:
cooperative; corporate finance; moral hazard; vertical integration.;
Other versions of this item:
- Hueth, Brent & Marcoul, Philippe & Ginder, Roger G., 2005. "Cooperative Formation And Financial Contracting In Agricultural Markets," 2005 Annual meeting, July 24-27, Providence, RI 19324, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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