An Optimal Ownership Structure for Cooperatives

Abstract

This thesis identifies an optimal ownership structure for cooperatives. The objective of this structure is to maximize the joint income of the members of that cooperative. To achieve this objective, this structure must resolve two problems which are inherent in the cooperative form of ownership: the Coordination Problem and the Horizon Problem.

The Coordination Problem is how the members of a cooperative can coordinate their private decisions to maximize their joint income if they are not alike. The Horizon Problem is how a cooperative’s members can capture its future profits which are due to their past investments in the cooperative if they leave the cooperative before these investments have paid off.

In this thesis, I use a cooperative decision model to derive a budget-balanced, implementable profit-sharing rule which resolves these two problems. The cooperative ownership structure which is based on this rule has two properties: the members of the cooperative share its profit in proportion to their share of its patronage and they can sell the right to use the cooperative on a market for patronage rights.

This thesis contains three case studies of cooperatives which show that the Coordination Problem cannot be fully resolved if the cooperative trades several products with its members, if it can compete with its members and if its members can improve the cooperative’s profit by their inobservable effort.