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Uncertainties And Governance Structure In Incentives Provision For Product Quality

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  • Deng, W.
  • Hendrikse, G.W.J.

Abstract

This paper compares the product quality provision of cooperatives and investor owned firms (IOFs) by highlighting the impacts of uncertainties in agricultural production and marketing, and farmers’ risk aversion. In a principal-agent model, we show that the linear contract can shift the risk of market uncertainty from farmers to processors, and pooling can share the risk of production uncertainty among cooperative members. Complete pooling places the cooperative at a disadvantage relative to the IOF in a quality-differentiated market due to the loss of free-riding dominating the gain of risk-sharing. Product quality of cooperatives decreases when the membership size increases. Cooperatives can overcome this disadvantage by partial pooling. Product quality of cooperatives will be equivalent to that of IOFs when an optimal income rights structure with partial pooling is adopted.

Suggested Citation

  • Deng, W. & Hendrikse, G.W.J., 2012. "Uncertainties And Governance Structure In Incentives Provision For Product Quality," ERIM Report Series Research in Management ERS-2012-016-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    • Handle: RePEc:ems:eureri:37346
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    References listed on IDEAS

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    1. Murray Fulton, 1995. "The Future of Canadian Agricultural Cooperatives: A Property Rights Approach," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(5), pages 1144-1152.
    2. George Hendrikse, 2011. "Pooling, Access, and Countervailing Power in Channel Governance," Management Science, INFORMS, vol. 57(9), pages 1692-1702, March.
    3. Andrei Cechin & Jos Bijman & Stefano Pascucci & Decio Zylbersztajn & Onno Omta, 2013. "Quality in Cooperatives versus Investor‐owned Firms: Evidence from Broiler Production in Paraná, Brazil," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 34(3-5), pages 230-243, April.
    4. Tina L. Saitone & Richard J. Sexton, 2009. "Optimal Cooperative Pooling in a Quality-Differentiated Market," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1224-1232.
    5. 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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