The cooperative (CO) solution will therefore be
a∞( X f $ if<⅛≤P SCO,} = f P ■ «У if ci ≤ P y.
91 ' ' ɪ 0 otherwise * ' ' ɪ 0 otherwise
i.e. the cooperative leads to the socially optimal solution from the last sec-
tion.
One interpretation of Proposition 2 is therefore that in a not too profitable
market, i.e. when p ≤ cjz Vi, the socially Optimalproduction levels are imple-
mentable if and only if the surplus is shared as in a cooperative modula zero
mean lotteries. This provides an information economic rationale for cooper-
atives. Cooperatives not only suffices to give the socially optimal production
levels. Except for zero mean lotteries, cooperative sharing of the net revenue
product is necessary also to ensure optimality. In any other organization, the
farmers’ attempts to extract informational rents will lead to a loss of desir-
able production. Note that contrary to the traditional under-production or
under-investment problem resulting from a hold-up possibility under perfect
information, cf. the Introduction, the present potential under-production
problem cannot be handled by ar priori negotiation of the contracts. Long or
short contracts, any attempt to divert any of the surplus from the farmers -
or any attempt to share the surplus in any other way than proportional to
patronage - will lead to sub-optimal production.
In a more profitable market, i.e. when p > c-z, the cooperative still leads
to the social optimum. But there are other possibilities as emphasized by
Proposition 3. There is some room for a paying the processor non-zero profit
- or for paying a non-zero interest on the cooperative equity. There is also
some room for payments that are not proportional to partronage. The room
for variations which do not eliminate the social optimality of cooperative-like
arrangements is given by ∑j=p>cy(P ~ c.f.(4).
5 Investor Owned Processor
Let us assume now that the processor is an investor owned, risk neutral profit
maximizing monopsonist. Being a monopsonist, we assume that the proces-
sor has all the bargaining power. Specifically, he is able to offer contracts on
a take it or leave it basis and to commit to these contracts as information is
revealed.