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Cooperative Formation and Financial Contracting in Agricultural Markets

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Author Info
Brent Hueth
Philippe Marcoul
Roger G. Ginder

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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, "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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Publisher Info
Paper 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.

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Date of creation: Oct 2004
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Handle: RePEc:ias:cpaper:03-wp349

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Related research
Keywords: cooperative; corporate finance; moral hazard; vertical integration.;

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References listed on IDEAS
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  1. Hueth, Brent & Ligon, Ethan, 2002. "Producer Price Risk and Quality Measurement," Staff General Research Papers 5037, Iowa State University, Department of Economics.
  2. Hennessy, David A., 2002. "Information Asymmetry as a Reason for Food Industry Vertical Integration," Staff General Research Papers 5032, Iowa State University, Department of Economics.
  3. Dow, Gregory K. & Putterman, Louis, 2000. "Why capital suppliers (usually) hire workers: what we know and what we need to know," Journal of Economic Behavior & Organization, Elsevier, vol. 43(3), pages 319-336, November. [Downloadable!] (restricted)
  4. Peter Bogetoft & Henrik Ballebye Olesen, 2003. "Incentives, Information Systems, and Competition," American Journal of Agricultural Economics, American Agricultural Economics Association, vol. 85(1), pages 234-247, 02. [Downloadable!] (restricted)
  5. Martinez, Steve W., 1999. "Vertical Coordination in the Pork and Broiler Industries: Implications for Pork and Chicken Products," Agricultural Economics Reports 34031, United States Department of Agriculture, Economic Research Service. [Downloadable!]
  6. Richard J. Sexton & Terri A. Sexton, 1987. "Cooperatives as Entrants," RAND Journal of Economics, The RAND Corporation, vol. 18(4), pages 581-595, Winter. [Downloadable!] (restricted)
  7. Hueth, Brent & Melkonyan, Tigran, 2005. "Quality Measurement and Contract Design: Evidence from the North American Sugar Beet Industry," Staff General Research Papers 12350, Iowa State University, Department of Economics.
  8. Ben-Ner, Avner & Jun, Byoung, 1996. "Employee Buyout in a Bargaining Game with Asymmetric Information," American Economic Review, American Economic Association, vol. 86(3), pages 502-23, June. [Downloadable!] (restricted)
  9. Holmström, Bengt & Tirole, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers 40, Institut d'Économie Industrielle (IDEI), Toulouse.
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  10. Stafford, Thomas H. & Roof, James B., 1984. "Marketing Operations of Dairy Cooperatives," Research Reports 52025, United States Department of Agriculture, Rural Development Business and Cooperative Programs. [Downloadable!]
  11. Gregory Dow, 2001. "Allocating Control over Firms: Stock Markets versus Membership Markets," Review of Industrial Organization, Springer, vol. 18(2), pages 201-218, March. [Downloadable!] (restricted)
  12. Chan, Yuk-Shee & Kanatas, George, 1985. "Asymmetric Valuations and the Role of Collateral in Loan Agreements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(1), pages 84-95, February. [Downloadable!] (restricted)
  13. Bonin, John P & Jones, Derek C & Putterman, Louis, 1993. "Theoretical and Empirical Studies of Producer Cooperatives: Will Ever the Twain Meet?," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1290-320, September. [Downloadable!] (restricted)
  14. Rey, Patrick & Tirole, Jean, 2007. "Financing and Access in Cooperatives," IDEI Working Papers 404, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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