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Free-riding on product quality in cooperatives: Lessons from an experiment

Lookup NU author(s): Dr Diogo Monjardino De Souza Monteiro

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This is the authors' accepted manuscript of an article that has been published in its final definitive form by Oxford University Press, 2019.

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Abstract

An important issue facing marketing cooperatives is that the overall quality of theproduct depends on the quality of farm products provided by individual members. Weconduct an experiment to empirically investigate producer incentives to free-ride onquality among members of a marketing cooperative in a setting where the averagequality provided by members of the cooperative results in a collective rent that is distributedback to members in a patronage dividend levied in proportion to the quantityproduced. Hidden actions by cooperative members that impact quality are imperfectlymonitored, but free-riding, when detected, results in exclusion from cooperative returns.The randomized payoff structure of our game results in a novel experimentaldesign that nests public good games and multi-player assurance games. Our findingsindicate that free-riding on product quality is deterred when: (i) cooperatives base patronagedividends on quality outcomes of smaller groups; (ii) payoffs from free-ridingare randomized by the possibility of exclusion from cooperative returns; and (iii) cooperativesdistribute a larger share of returns to members through indirect paymentssuch as capital pooling and cost sharing arrangements unrelated to product quality.


Publication metadata

Author(s): Olivier O, Garapin A, Hamilton SF, Souza Monteiro DM

Publication type: Article

Publication status: Published

Journal: American Journal of Agricultural Economics

Year: 2019

Volume: 101

Issue: 1

Pages: 89-108

Print publication date: 01/01/2019

Online publication date: 29/05/2018

Acceptance date: 29/03/2018

Date deposited: 10/10/2016

ISSN (print): 0002-9092

ISSN (electronic): 1467-8276

Publisher: Oxford University Press

URL: https://doi.org/10.1093/ajae/aay025

DOI: 10.1093/ajae/aay025


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