Social capital and incentives in the provision of product quality by cooperatives

This article highlights the interaction between social capital, pooling and quality premiums and their influence on cooperative members’ decisions regarding their product quality. A necessary condition for cooperative equitable principles such as complete pooling is that there exists a high level of social capital in the cooperative. When the level of social capital is high, the social motivation in the cooperative can guarantee high product quality while economic incentives are weak. When the level of social capital declines, an income rights structure with stronger quality incentives must be adopted by the cooperative to maintain the product quality. The cooperative is uniquely efficient when the farmers are risk averse and product quality is uncertain. When the level of social capital in cooperatives is higher than a threshold, which is decreasing in members’ subjective risk toward production uncertainty, cooperatives are able to achieve higher product quality than investor owned firms (IOFs).