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Free-riding on product quality in cooperatives: Lessons from an experiment

Author

Listed:
  • Olivier Bonroy

    (GAEL - Laboratoire d'Economie Appliquée de Grenoble - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - INRA - Institut National de la Recherche Agronomique - CNRS - Centre National de la Recherche Scientifique - UGA [2016-2019] - Université Grenoble Alpes [2016-2019], INRA - Institut National de la Recherche Agronomique)

  • Alexis Garapin

    (GAEL - Laboratoire d'Economie Appliquée de Grenoble - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - INRA - Institut National de la Recherche Agronomique - CNRS - Centre National de la Recherche Scientifique - UGA [2016-2019] - Université Grenoble Alpes [2016-2019], UGA UFR FEG - Université Grenoble Alpes - Faculté d'Économie de Grenoble - UGA [2016-2019] - Université Grenoble Alpes [2016-2019])

  • Stephen Hamilton

    (CAL POLY - California Polytechnic State University [San Luis Obispo])

  • Diogo Souza-Monteiro

    (Newcastle University [Newcastle], School of Natural and Environmental Sciences - Newcastle University [Newcastle])

Abstract

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.

Suggested Citation

  • Olivier Bonroy & Alexis Garapin & Stephen Hamilton & Diogo Souza-Monteiro, 2019. "Free-riding on product quality in cooperatives: Lessons from an experiment," Post-Print hal-01767655, HAL.
  • Handle: RePEc:hal:journl:hal-01767655
    DOI: 10.1093/ajae/aay025
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01767655
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    Cited by:

    1. Castriota, Stefano, 2018. "Does Excellence Pay Off? Quality, Reputation and Vertical Integration in the Wine Market," 2018 Annual Meeting, August 5-7, Washington, D.C. 273802, Agricultural and Applied Economics Association.
    2. Kwon-Sik Kim & Seong-ho Jeong, 2019. "Free Riding without Dead Weight Losses," Sustainability, MDPI, Open Access Journal, vol. 11(19), pages 1-15, September.

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