A study of the property rights constraints in US agricultural cooperatives : theory and evidence

Abstract

This research addresses the issue of efficient user-owned and controlled organizational design. Using agricultural cooperatives as an example set of user-owned and controlled institutional arrangements, the economic issue examined is the degree of residual rights of control and residual claims alignment. Leading organizational scholars ( e.g., Milgrom and Roberts 1992, Hart 1995, and Hart and Moore 1998) suggest that, in the case of a firm, it is advantageous to have as many decision rights as possible vested with the party receiving the residual returns. This is because in the process of maximizing its own individual returns, that party will also generally be led to maximize organizational efficiency. Until now, scholarly work has concentrated on investor-oriented forms of business organization. This study explores the applicability of the residual claims-residual control rights argument to alternative business forms. Specifically, this dissertation inspects the strength of the residual claims-residual control rights-criterion in examining user-owned firms. Even more specifically, this research applies the Coasian "nexus of contracts" definition of efficiency to user-owned agricultural cooperatives in US. From a neoinstitutional point of view, this study is concerned with the design of a producer-driven, collective action, business organization-an ex ante contract which assigns residual rights of control and residual claimant rights in an organizational efficiency-maximizing way. In designing an efficiency-maximizing institutional arrangement for a producer owned and controlled business firm, several important questions must be addressed. Some of these questions include; what are the origins of the current property right structure in US producer-owned business firms in agriculture? What are the efficiency implications of this structure? How could the inefficiencies characterizing this property right structure be ameliorated? What might be the characteristics of an efficiently designed producer-owned alternative ownership structure? Which ownership structure is successful in aligning residual rights of control and residual claims? This research provides answers to these questions by developing a neoinstitutional theoretical framework for analyzing and comparing alternative firm ownership structures. This neo-institutional theoretical framework is particularly applicable to studying incentives facing the residual claimants of a firm and their investment behavior under various property right assignments. The impact of the property rights structure on investment incentives facing cooperative stakeholders, and particularly, members and management, has been crystallized into a set of three problems, facing traditional US agricultural cooperatives. These are the free rider, the horizon, and the portfolio constraints. The main hypothesis of this research is that the property rights structure observed in cooperative firms significantly affects the incentives of members to invest in their organizations. To test this hypothesis, a structural equation model with latent variables is developed and tested against data from a national survey of US agricultural cooperatives. The information provided by these data enables a detailed description, documentation, and summarization of the ownership structure of both traditional and new generation forms of collective action in US agriculture. Subsequently, the most statistically significant property right characteristics for providing investment incentives to the stakeholders of producer-owned firms are identified ad empirically verified. The obtained results suggest that the property rights structure of US agricultural cooperatives significantly affect members' incentive to invest in their organizations. Clearly defined property rights are a prerequisite for attracting members' equity capital to US agricultural cooperatives. The results of this study have serious implications for cooperative organizational design and strategic management, as well as for public policy.