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

Cooperatives and mutual organisational forms arise for reasons which include contracting problems between parties. Economic literature suggests a variety of allocated inefficiencies implied by these forms that largely have their origins in poor investment decisions. We demonstrate that a multi-period model and the supplier and cooperative valuations it implies are essential for understanding the sources of inefficiency and solutions to them. Using the case of a supplier cooperative we show that economic inefficiency arises because of the over-supply of input induced by suppliers responding to average rather then marginal revenue and that investment is actually efficient given the supply of input. The presence of unowned capital is an important source of over-supply. We show that if cooperative's shares are priced at the present value of expected dividends and supplier entry and exit decisions are taken solely on the basis of profitability of membership then there is no inefficiency and we describe a functioning example. Finally our valuations show that there is no "time horizon" investment problem at least from an industry prospective.