Free‐Riding on Product Quality in Cooperatives: Lessons from an Experiment

20 Pages Posted: 21 Apr 2020

See all articles by Olivier Bonroy

Olivier Bonroy

affiliation not provided to SSRN

Alexis Garapin

University of Grenoble

Stephen F. Hamilton

California State Polytechnic University, San Luis Obispo

Diogo Souza Monteiro

affiliation not provided to SSRN

Date Written: January 2019

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.

Keywords: Free‐riding, cooperative, experimental analysis, collective action game, probability of exclusion

Suggested Citation

Bonroy, Olivier and Garapin, Alexis and Hamilton, Stephen F. and Souza Monteiro, Diogo, Free‐Riding on Product Quality in Cooperatives: Lessons from an Experiment (January 2019). American Journal of Agricultural Economics, Vol. 101, Issue 1, pp. 89-108, 2019, Available at SSRN: https://ssrn.com/abstract=3577988 or http://dx.doi.org/10.1093/ajae/aay025

Olivier Bonroy (Contact Author)

affiliation not provided to SSRN

No Address Available

Alexis Garapin

University of Grenoble ( email )

Grenoble
France

Stephen F. Hamilton

California State Polytechnic University, San Luis Obispo ( email )

San Luis Obispo, CA 93407
United States
805-756-2555 (Phone)

Diogo Souza Monteiro

affiliation not provided to SSRN

No Address Available

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