Chapter 5

The Evolution of Solutions to the Free Rider Problem in US Agricultural Bargaining Cooperatives

Constantine Iliopoulos

Abstract

This paper addresses the issue of how intra-organizational incentive alignment mechanisms evolve to solve the free rider problem in collective bargaining. We focus on agricultural bargaining cooperatives (ABCs), a particular form of producer-owned firms mainly observed in the West Coast states of the US. These organizations play several crucial institutional roles that include, among others, enhancing farmers’ countervailing power vis-à-vis powerful processors, deterring postcontractual opportunism, enabling price discovery, and ameliorating moral hazard and adverse selection problems. The single most important factor that constrains ABCs’ ability to play such roles is the free rider problem. The latter refers to the situation where a non-member receives benefits associated with the provision of public goods by the cooperative (e.g., higher commodity prices), but avoids becoming a member-and thus eschews contributing to the costs associated with this provision, which are incurred by members alone. We review quantitative and qualitative evidence collected for more than ten years from ABCs to explore the evolution of solution instruments used to align member incentives and thus minimize the inefficiencies arising from the free rider problem. The obtained results suggest that mechanisms evolve from Market to Community to Contract to Hierarchy solutions. In organizations characterized by highly heterogeneous memberships the provision of a combination of intra-organizational incentives is the only means to addressing the free rider problem efficiently.

Total Pages: 77-94 (18)

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