The Advantage of Cooperatives under Asymmetric Cost Information

The Advantage of Cooperatives under
Asymmetric Cost Information

Peter Bogetoft, Peter M.F. Jensen and René H. Olsen

Department of Economics

Royal Agricultural University (KVL)

26 Rolighedsvej, DK-1958 Frederiksberg C

Denmark

e-mails: [email protected], [email protected], [email protected]

January 1999

Abstract

We consider how to organize the processing and marketing of an
agricultural product when farming costs are known only by the indi-
vidual farmers. We show that when marginal costs are un-eorreɪated
and the market for final goods is competitive, the socially optimal pro-
duction levels may be sustained by a cooperative and a cooperative
only. We show also that the cooperative form is particularly useful
when the uncertainty is large and the net revenue product is small.

Keywords: Economics of Cooperatives, Asymmetric Informa-
tion, Incentives.

1 Introduction

A cooperative’s primary trading partners are the members which are also the
residual claimants. This suggests that a cooperative may have comparative
advantages in terms of incentive compatibility.

Staatz(1984) among others have argued that the risk of post-harvest
’hold-ups’ is a primary reason for cooperatives active presence in the mar-
keting of short lived products like fruits, vegetables and milk. On the other

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