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

18 Pages Posted: 24 Mar 2003

See all articles by Lewis T. Evans

Lewis T. Evans

Victoria University of Wellington - New Zealand Institute for Study of Competition and Regulation Inc. (ISCR)

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance

Date Written: July 13, 2002

Abstract

Cooperative and mutual organisational forms arise for reasons that include contracting problems between parties. Economic literature suggests a variety of allocative 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 common over-supply of input induced by suppliers responding to average, rather than 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 the 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 that there is no "time horizon" investment problem, at least from an industry perspective.

Keywords: cooperatives, valuation

JEL Classification: D92, G32, G35, L22, Q13

Suggested Citation

Evans, Lewis T. and Guthrie, Graeme, A Dynamic Theory of Cooperatives: The Link between Efficiency and Valuation (July 13, 2002). Available at SSRN: https://ssrn.com/abstract=367381 or http://dx.doi.org/10.2139/ssrn.367381

Lewis T. Evans (Contact Author)

Victoria University of Wellington - New Zealand Institute for Study of Competition and Regulation Inc. (ISCR) ( email )

Wellington 6001
New Zealand
64 4 4635562 (Phone)
64 4 4635566 (Fax)

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6140
New Zealand
64 4 463 5763 (Phone)

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