Free-riding on Product Quality in Cooperatives: Lessons from an Experiment

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.