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

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