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A Dynamic Theory of Cooperatives: The Link between Efficiency and Valuation

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  • Lewis Evans
  • Graeme Guthrie

Abstract

We demonstrate that a multi-period model, and the valuations it implies, is essential for understanding inefficiency in cooperative organizational forms. Investment is efficient given the supply of input, but economic inefficiency arises because of over-supply of input induced by suppliers responding to average, rather than marginal, revenue. We show that inefficiency disappears if the cooperative's shares are priced at the present value of expected dividends and supplier entry and exit decisions are taken on the basis of profitability of membership. This pricing scheme simplifies cooperative governance by lowering transaction costs of governance with heterogeneous suppliers. We describe a functioning example.

Suggested Citation

  • Lewis Evans & Graeme Guthrie, 2006. "A Dynamic Theory of Cooperatives: The Link between Efficiency and Valuation," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(2), pages 364-383, June.
  • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200606)162:2_364:adtoct_2.0.tx_2-s
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    References listed on IDEAS

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    1. Jensen, Michael C & Meckling, William H, 1979. "Rights and Production Functions: An Application to Labor-managed Firms and Codetermination," The Journal of Business, University of Chicago Press, vol. 52(4), pages 469-506, October.
    2. Eugene Clark, 1952. "Farmer Cooperatives and Economic Welfare," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 34(1), pages 35-51.
    3. Peter Helmberger & Sidney Hoos, 1962. "Cooperative Enterprise and Organization Theory," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 44(2), pages 275-290.
    4. Gregory Dow, 1996. "Replicating Walrasian equilibria using markets for membership in labor-managed firms," Review of Economic Design, Springer;Society for Economic Design, vol. 2(1), pages 147-162, December.
    5. Harris, Andrea & Stefanson, Brenda & Fulton, Murray E., 1996. "New Generation Cooperatives and Cooperative Theory," Journal of Cooperatives, NCERA-210, vol. 11.
    6. William R. Emmons & Frank A. Schmid, 2002. "Pricing and Dividend Policies in Open Credit Cooperatives," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 158(2), pages 234-234, June.
    7. Kevin Davis, 2001. "Credit Union Governance and Survival of the Cooperative Form," Journal of Financial Services Research, Springer;Western Finance Association, vol. 19(2), pages 197-210, April.
    8. 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 1290-1320, September.
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    10. Benham, Lee & Keefer, Philip, 1991. "Voting in Firms: The Role of Agenda Control, Size and Voter Homogeneity," Economic Inquiry, Western Economic Association International, vol. 29(4), pages 706-719, October.
    11. Peter Vitaliano, 1983. "Cooperative Enterprise: An Alternative Conceptual Basis for Analyzing a Complex Institution," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 65(5), pages 1078-1083.
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    Cited by:

    1. Evans, Lewis & Meade, Richard, 2005. "The Role and Significance of Cooperatives in New Zealand Agriculture, A Comparative Institutional Analysis," Working Paper Series 3847, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    2. Hailu, Getu & Goddard, Ellen W. & Jeffrey, Scott R., 2005. "Measuring Efficiency in Fruit and Vegetable Marketing Co-operatives with Heterogeneous Technologies in Canada," 2005 Annual meeting, July 24-27, Providence, RI 19507, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    3. Albert Jolink & Eva Niesten, 2012. "Hybrid Governance," Chapters,in: Handbook on the Economics and Theory of the Firm, chapter 12 Edward Elgar Publishing.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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