The Advantage of Cooperatives under Asymmetric Cost Information

The market oriented solution from Proposition 2 is not only attractive by
being simple and being the only solution that will work irrespectively of the
relationship between p and c{^z. It is also attractive from a point of view of
treating all farmers equally. Moreover, the equity property implies that the
mechanism is not vulnerable to side trading - no group of farmers can profit
from trading the product among themselves before it is processed.

4 Cooperative Processor

There are some obvious links between the central planner’s solutions in the
last section and the cooperative arrangements that have be used so exten-
sively, in particular within agriculture.

Image that processing is ιmdertaken by a cooperative. The cooperative
is owned and operated by the farmers. Assume furthermore that this is a
traditional cooperative in which

1. Equity gets no interest,

2. Surplus is allocated to members in proportion to patronage,

3. Members have a right to deliver total production to the cooperative

Using the first two principles, we see that the total surplus p ɪʌeʃ ¾' ɪɪɪust
be allocated as

In this payment plan, we have taken into account the fact that any farmer j
only knows his own costs c₃∙ and that his production decision therefore can
only depend on c_j. By the farmers being risk neutral and by using the third
principle above, we get that farmer i will choose ¾(c<) to solve

-Ci ∙ft(c∣)l

s.t. 0 ≤ q_i(c_i) ≤ Qi

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