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Organizational structure and the endogeneity of cost : cooperatives, for-profit firms and the cost of procurement

Author

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  • Bontems, P.
  • Fulton, M.

Abstract

In this paper, we show formally that cooperatives can possess an informational -and hence cost- advantage compared to For Profit Firms (FPFs). Hence the standard practice of modeling the cooperative and the FPF as having identical cost structures appears to be theoretically unsound. The cooperative cost -and hence production efficiency- advantage is directly linked to the goal alignment between the cooperative and its members, and is influenced by the extent of income redistribution betwen members and the degree of rent seeking that takes place in the organization. When there is no aversion to income inequality, the members produce at their first best levels. However, as aversion to inequality rises, the production profile of the members converges to the production profile generated when the members face an FPF. Regarding rent seeking if the more (less) efficient members are able to get their profits valued more, total output is increased (devreased). As a consequence, consumers may benefit from the lobbying that occurs inside a cooperative where the powerful members are the most efficient agents. ...French Abstract : Les auteurs montrent formellement dans cet article que les coopératives peuvent résoudre des problèmes d'agences internes à moindre coût que les firmes possédées par des investisseurs extérieurs. L'hypothèse standard consistant à retenir les mêmes structures de coûts pour les deux types d'organisation apparaît alors comme étant infondée d'un point de vue théorique. L'avantage de la forme coopérative en terme d'efficience réside dans le plus grand degré de congruence entre le manager et les membres. Cet avantage est également influencé par l'étendue de la redistribution entre membres opérée au sein de la coopérative et la distribution des pouvoirs au sein de la structure. La production de premier rand est obtenue lorsqu'il y a absence d'aversion pour l'inégalité au sein de la coopérative. Si le degré d'aversion pour l'inégalité augmente alors le profil de production converge vers celui optimal au sein d'une firme possédée par des investisseurs extérieurs. En ce qui concerne l'effet de la distribution du pouvoir politique, si les membres les plus (moins) efficaces sont à même d'obtenir une plus grande valorisation collective de leur revenu, alors la production globale est accrue (diminuée). Ainsi, les consommateurs peuvent bénéficier du lobbying interne à la coopérative lorsque les membres les plus puissants et donc les plus susceptibles d'influencer les décisions sont aussi les plus efficients du point de vue de la production.

Suggested Citation

  • Bontems, P. & Fulton, M., 2005. "Organizational structure and the endogeneity of cost : cooperatives, for-profit firms and the cost of procurement," Economics Working Paper Archive (Toulouse) 200507, French Institute for Agronomy Research (INRA), Economics Laboratory in Toulouse (ESR Toulouse).
  • Handle: RePEc:rea:inrawp:200507
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    File URL: http://www.toulouse.inra.fr/centre/esr/wpRePEc/bon200507.pdf
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    Cited by:

    1. Lemeilleur, Sylvaine & Bignebat, Celine & Cordon, J.M., 2007. "Marketing Cooperative vs Producer's Agent: The Turkish Dilemma in Modern FFV Market," 103rd Seminar, April 23-25, 2007, Barcelona, Spain 9405, European Association of Agricultural Economists.

    More about this item

    Keywords

    ADVERSE SELECTION; COOPERATIVES; FOR-PROFIT FIRMS ; THEORIE DE LA FIRME; ORGANISATION; ORGANISATION DE L'ENTREPRISE; COOPERATIVE;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness

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