Vertical Integration, Contracts, and the Theory of the Cooperative Organization By: Constantine Iliopoulos Agricultural Economics and Policy Research Institute National Agricultural Research Foundation Greece Paper presented at the Conference Vertical Markets and Cooperative Hierarchies: The Role of Cooperatives in the International Agri-Food Industry Bad Herrenalb, Germany, 12-16 June 2003 This publication is based (partly) on the presentations made at the European Research Conference (EURESCO) on "Vertical Markets and Cooperative Hierarchies: The Role of Cooperatives in the International Agri-Food Industry - A EuroConference on Agri-Food Cooperatives in the New Millennium: Competition & Organisation" (Bad Herrenalb, Germany, 12-16 June 2003) organised by the European Science Foundation and supported by the European Commission, Research DG, Human Potential Programme, High-Level Scientific Conferences, Contract HPCF-CT-2000-00172. This information is the sole responsibility of the author(s) and does not reflect the ESF or Community's opinion. The ESF and the Community are not responsible for any use that might be made of data appearing in this publication. Conference Site: http://www.esf.org/esf_euresco_conference.php?language=0&domain=4&conference=171&meeting=1 Proceedings: http://www.flec.kvl.dk/kok/coop03/ Vertical Integration, Contracts, and the Theory of the Cooperative Organization 1. Introduction The last decade of the 20th century saw an increased interest in institutional arrangements that would enhance food and agribusiness inter- and intra-firm coordination along the vertical chain (Lazzarini et al., 2001; Reardon and Barrett, 2000). New forms of collective action emerged, some of which were producer-led (Cook, 1995). Correspondingly, economic theories were developed in order to study these forms and provide explanations regarding their organizational characteristics. However, a number of crucial questions remain unanswered. Particularly at the cooperative level, the issue of whether the cooperative represents a form of vertical integration or simply a separate firm has not yet been satisfactorily addressed. Despite theoretical developments in the 1980’s and 1990’s that provided the conceptual tools necessary to fill this gap, scholars have focused on other, equally important issues. Recently, however, the renewed scholarly interest in hybrid organizational forms may suggest that this picture is changing (Sauvee, 1998). The accelerating interest in hybrid governance structures during the last years has generated a wealth of publications in economic and management journals (Menard, 2002). We are now in a much better position to understand hybrids, their major characteristics and their impact on agribusiness coordination. Yet, we know relatively little – albeit more than ever before – about the choice of vertical integration and coordination strategies by cooperatives. While the seeds of a theory of cooperative vertical integration were planted several decades ago, much more is needed. The purpose of this article is to address the issue of whether the cooperative represents a hybrid form and proffer a new framework for analyzing cooperative hybrids. Moreover, the mechanisms underlying the choice of a specific governance mode by cooperatives are 1 discussed. In doing so, I address strategic and governance issues facing cooperatives and suggest that decisions regarding cooperative boundaries and internal organization are interrelated. Beginning with a brief overview of the economic theory of cooperatives, I go on to discuss cooperatives as hybrid governance structures, analyze the determinants of specific governance structures and conclude with a set of topics that could form the basis of a future research agenda. 2. Vertical Integration in the Cooperative Theory Literature 2.a The Pre-1990 Period Vertical integration has been a topic of study in cooperative theory since the 1940’s. Until the early 1960’s much of the debate focused on whether cooperatives represented purely a form of vertical integration by farmers, that is, simply an extension of the member firms, or whether cooperatives could legitimately be analyzed as organizations having scope for decision-making independent of their member firms. Emelianoff (1942) was the first to analyze the cooperative as a form of vertical integration in a formal model. His main argument was that because a cooperative operates at cost, it does not incur profits or losses itself; only its members incur profits and losses. Therefore, the cooperative is not an acquisitive unit and hence not a firm. Robotka and Phillips advanced Emelianoff’s model and Phillips (1953) derived optimal cooperative output and pricing decisions. The basic idea was that an extension of the standard neoclassical theory of the multi-plant firm would suffice to develop a theory of the cooperative firm. As a result, Phillips argued that the cooperative represents a jointly owned plant operated by independent member firms. Later critics of this model posed as its major limitation the gap in addressing the broader question of how a firm determines its degree of participation in the cooperative (Staatz, 1989). 2 Starting with Enke’s (1945) analysis of a consumer cooperative as a separate type of business firm and continuing with the classical work of Helmberger and Hoos on agricultural cooperatives, another strand of cooperative theory research was introduced. According to Helmberger and Hoos (1962), whose framework became the standard model in cooperative theory for nearly twenty years, the agricultural cooperative could be modeled as a separate firm using tools from the standard neoclassical theory of the investor-oriented firm (IOF). Unlike Phillips, Helmberger and Hoos addressed questions related to the optimal membership size, thus shifting focus away from vertical integration issues. The “cooperative as a firm” approach was extended in the 1970’s and early 1980’s. Despite the introduction of advanced models of cooperative pricing and output decisions, most of the vertical integration-related issues were obscured by elaborate mathematical analyses. With the introduction of game-theoretical tools and concepts from New Institutional Economics, the 1980’s saw a renewed interest in cooperative theory that was also reflected in attempts to answer questions related to vertical integration. For example, Sexton (1984, p. 15) argues that cooperation represents “horizontal coordination to achieve mutual vertical integration.” Another school of cooperative theory has its origins in the 1950’s. Scholars such as Kaarlehto, Ohm, and Triffon viewed the cooperative as a coalition (Staatz, 1989). Sexton and Staatz further developed their ideas in the 1980’s in game-theoretical models that addressed bargaining within cooperatives, voting issues, and the role of trust and member loyalty. The renewed interest in cooperative theory that was observed in the 1980’s took another promising direction with the advent of the New Institutional Economics (NIE). NIE theories of transaction costs, agency and incomplete contracts/property rights provided new insights into the operation and behavior of cooperative organizations (Cook et al.). Such 3 approaches were primarily interested in issues of intra-cooperative coordination, capital constraints amelioration and organizational design. This “cooperative as a nexus of contracts” school of thought overcame the debate on whether the cooperative is a form of vertical integration or simply a separate firm by focusing on the relationships of the various stakeholders and the resulting implications for cooperative performance. For example, Staatz (1989) noted that: “In the final analysis, what is crucial is not how we label the cooperative but the nature of the business relationships among the various participants in the organization. These relationships can be viewed as representing a set of explicit and implicit contracts… It is the nature of the implicit and explicit contracts among participants in a cooperative that determines the degree to which the cooperative achieves goals similar to those of a vertically integrated firm, and so on” (p. 14). However, the “nature of these contracts” both affects and is affected by the governance structure an organization adopts. Besides the two polar cases of market and hierarchy, a “collection of weirdos” exists (Menard, 2002). Beginning in the mid-1980’s and continuing thereafter, agricultural economists recognized the importance of studying the organizational forms that lie in between the market and complete vertical integration. Choosing among several alternatives is only one of the multitude of dilemmas facing economic actors as the following sections reveal. 2b. The Cooperative as a Hybrid Exceptions to the negligence of vertical integration issues in cooperative theory were also observed in the 1980’s, the most notable being Shaffer and Staatz (1986), Shaffer (1987), and Bonus (1986). Shaffer explores possible roles of agricultural cooperatives in dealing with the fundamental problems of coordinating economic activities under uncertainty. He argues that the cooperative represents a third mode of organizing coordination, which combines characteristics of markets and internal (integrated) coordination in ways that are different from either. 4 In order to understand this point it is crucial to refer to his definitions of vertical integration and cooperative organization. Following Williamson, this author defines vertical integration as the coordination of technically separable activities in the vertical sequence of production and distribution under the control of an organization by ownership. Shaffer defines the cooperative as an association of farmer patrons, democratically governed, that owns one or more firms (Producer-Owned Firms-POFs) from which member-patrons receive benefits (or incur costs) based on patronage rather than stock ownership. He explicitly states that, “the distinction between the cooperative association and the firms owned by the association is an important one” (Shaffer, 1987, p. 63). Shaffer argues that the cooperative is not a form of horizontal integration because the member firms are independently owned, represent independent profit centers, and act independently except as they have agreed to own a firm jointly or have negotiated agreements to act collectively. Nor does a cooperative represent vertical integration between member firms and the patron-owned firm (POF) because the members own the POF but remain independent and neither the association nor the management controls the farms of the members. In the cooperative, the relationship between members and their cooperative most resembles a contingency contract in market coordination (Shaffer and Staatz, 1986; Staatz, 1987). Thus, the cooperative is neither a market nor a hierarchy, but a form of hybrid governance structure. In addition, Shaffer notes that although vertical integration is usually regarded as a form of ownership, ownership does not necessarily translate into effective control. Therefore, in the absence of effective member control, the POF might be indistinguishable from an IOF in regard to integration propensities except that it operates under a more limited access to capital for expansion. 5 Bonus (1986) proposes a transaction cost framework and contends that the cooperative is a coalition formed between farmers and their POF that has to balance the benefits of collective organization (centripetal forces) with those of independent operation (centrifugal forces). Frequently, however, there is no clear-cut case of either internalizing certain transactions into a firm, or for completely externalizing them from it. The existence of marked transaction-specific quasi-rents, for instance, calls for integration as the optimum form of coalition, while peripherally applied idiosyncratic knowledge rules out integration. In such cases hybrid organizational forms provide the most appropriate form of coalition, the cooperative being one of such forms. The main benefits of the cooperative hybrid form are achieved by internalizing crucial transactions into a POF jointly owned by the holders of transaction-specific resources, who thereby avoid potential hold-ups by outside opportunists. However, inside opportunism remains imminent. In the past, a set of dependable inner rules governing the cooperative’s policies (“cooperative spirit”) was sufficient to ameliorate this internal opportunism. As cooperatives evolved, the importance of such informal mechanisms eroded mainly due to an increase in size and a heterogeneous membership. Consequently, agency problems resulting from vaguely defined property rights became prevalent in agricultural cooperatives (Cook, 1995). Such problems call for protective institutional arrangements (Grossman and Hart, 1986; Hart and Moore, 1990). Hendrikse (1998) enriches previous models of decision making in cooperatives that have focused on the cooperative as a single entity or as a form of vertical integration by perceiving organizations as collections of decision units. According to this point of view, a cooperative consists of two units with each having the power of veto, whereas an IOF consists of only one decision unit. Another innovative aspect of this work is that it distinguishes between cooperatives and IOFs with respect to the probability each organizational form has of 6 accepting/rejecting “good” and “bad” projects. The major consequence of this is that two different organizational structures may coexist in equilibrium; an IOF is sustained because it faces higher expected revenue of good projects. A cooperative survives because lower expected costs of accepting bad projects outweigh the reduction in the expected revenue of accepting a good project. In a recent paper, Hendrikse and Bijman (2002) view the marketing cooperative as “a special type of vertical integration, with farmers owning assets in another tier of the agrofood production and distribution system” (p. 105). However, they are interested in inter- and eschew intra-firm issues. Sykuta and Cook (2001) focus on potential contractual differences between IOFs, traditional marketing cooperatives, and new forms of collective action. They conclude that contractors with different organizational structures may use different contract forms even when contracting for the same product from the same set of agricultural producers. Moreover, the differences in contract form will be directly related to the nature of the contractors’ organizational structures and the incentives they create. While the authors do not refer explicitly to vertical integration, they contend that “there is a spectrum of hybrid producerowned organizational forms designed to mitigate the costs and hazards associated with the five vaguely defined property rights problems identified by Cook” (p. 1275). Peterson et al. (2001) provide a framework for analyzing firm decisions with respect to vertical coordination strategies aligned to particular transactions. They define vertical integration as “multiple market stages under single ownership,” and use King’s (1992) definition of vertical coordination as the “alignment of direction and control across segments of a production/marketing system.” The factors that are aligned and controlled are price, quantity, quality, and terms of exchange (Sporleder, 1992). The authors contend that there exists a continuum of vertical coordination strategies ranging from open markets to vertical integration. Within this, there exists a sub-continuum of hybrid vertical coordination 7 strategies, which includes three generic types of hybrids: a) specification contracts, b) relation-based alliance, and c) equity-based alliance. Peterson et al. suggest that the latent variable creating the continuum is the intensity of control employed in order to assure that proper coordination occurs. According to the authors, the agricultural cooperative is a type of an “equity-based alliance.” Although control is accomplished organizationally, the member-owners maintain a separate identity and thus they can exercise their exit option. However, this opportunity is dramatically constrained by the presence of substantial investment in the independent entity (the POF). Control in equity-based alliances is a function of the property rights of the various stakeholders in the independent entity created by them. Ex ante, the control process consists of negotiating the formation of the formal decentralized organization that will govern the ex post resolution of any coordination concerns. Control of the transaction is delegated to the new, limited organization whereas ownership parties monitor results and adjust policies and procedures ex post. In this strategy, the real control power is exercised through the ex post processes and not the ex ante ones. Currently, a renewed interest in vertical integration/coordination through collective action is observed (Sauvee, 1997; Raynaud et al. 2002). While the focus is primarily on contractual and vertical coordination issues, the question of whether the cooperative is a hybrid governance structure remains largely open. The next section focuses on this question. 3. The Agricultural Cooperative as a Hybrid Governance Structure 3.1. Are Cooperatives Hybrids? The impressive literature on hybrid governance structures reflects the importance attached to these “strange forms” (Menard, 1996). But does the cooperative represent a hybrid form? Several reasons lie behind the need to address this question. First, understanding the particular form adopted by a cooperative will advance our knowledge of intra-cooperative 8 coordination, behavior, and problems. Consequently, it will facilitate cooperative leaders in devising ways to solve perceived critical problems and support efficient strategic management. Another reason is that the identification of the most important dimensions of the continuum between markets and hierarchies will facilitate the choice of a transaction cost minimizing governance structure. Furthermore, it will aid the design of mechanisms for ameliorating the five vaguely defined property rights problems identified by Cook (1995). Finally, at the public policy level, it will provide policy-makers with a comprehensive understanding of the unique cooperative characteristics and thus support them in designing and implementing relevant policies. Menard (2002) provides a superb overview of recent research on hybrids and proposes a framework for analyzing them based on the “discrete alignment principle” (Williamson, 1991). In order to address the question of whether the cooperative is a hybrid, Menard’s summary of the characteristics shared by the various hybrid forms provides an excellent framework. These are (1) Pooling, (2) Contracting, and (3) Competing. (1) Pooling Hybrids’ raison d’ ètre is the systematic optimization of activities through inter-firm coordination and cooperation. As a result, investment decisions must be made jointly. Hybrids exist because markets are perceived as unable to bundle resources and capabilities (Teece and Pisano, 1994), while integration would represent a loss in flexibility and incentives (Madhok and Tallman, 1998). The later represent a driving force in choosing a hybrid governance structure. A positive aspect is that the search for rents is a major motive behind strategies of pooling resources. The downside is that sharing rents requires difficult choices that can easily destabilize the arrangement. The most important consequences of the above are that 1) hybrids are selective rather than open systems, 2) they always involve some form of joint planning, and 3) information 9 flows among parties to an agreement is a key issue (Menard 2002, p. 7). These are crystallized in the first major problem facing hybrids: how to secure cooperation in order to achieve coordination at low transaction costs without loosing the advantages of decentralized decisions. (2) Contracting Formal and informal (e.g., relational) contracting is of major importance to all types of hybrids (Williamson, 1996). Given the incompleteness characterizing contracts, a governance structure must be chosen so that the designed mechanisms fill the blanks left in contracts, monitor the arrangement in an effective manner and solve problems that may arise in the future. Therefore, hybrids face a second major problem: how to secure contracts while minimizing costly and often difficult, if not impossible, negotiations and renegotiations. (3) Competing By maintaining a market characteristic – competition – hybrids avoid some of the inflexibilities associated with vertical integration. On the other hand, more than one hybrid may compete against each other in the same market. Indeed, there exists now abundant empirical evidence that hybrids tend to develop in highly competitive markets as a means of dealing with significant uncertainties and thus survive through pooling resources (Menard, 1996; Ghosh and John, 1999). The simultaneous existence of several hybrids in a market may lead one or more partners to rethink their individual strategies and switch to another arrangement. This form of free riding makes the implementation of an internal mode of regulation a central issue for hybrids (Menard, 2002). Hence, a third important problem arises for hybrids: what mechanisms are necessary in order to delineate decisions, discipline partners, and solve conflicts while preventing free-riding behavior? The way each group of cooperating individual organizations addresses the above three questions determines the particular form their hybrid will take (Menard 2002). Generally, 10 hybrid organizations and the specific forms they adopt represent an effort to align governance structures with exchange attributes so as to minimize transaction costs (Williamson, 1996). Agricultural cooperatives are hybrids since they share all three of the above characteristics. They always involve the optimization of activities through the coordination and cooperation of individual member-farms. Additionally, key investment decisions beyond the farm gate are made jointly. Cooperatives are formed in an attempt to either correct for perceived market failures (Sexton and Iskow, 1988) or capture rents by pooling resources (Cook, 1993). Their selective nature is manifested in their bylaws and policies (Zusman, 1992) or imposed on them by geographical, technological and other constraints (Banerjee et al., 2001). They also involve some form of joint planning that runs from a minimum (e.g., bargaining associations) to a maximum (e.g., new generation, value-added cooperatives). Equally important to cooperatives is the flow of information between members and their POF. For example, one of the major rationales for choosing the cooperative hybrid form in order to develop both the Farm Credit System in the US and rural credit cooperatives in the 19th century Germany was the minimization of the costs associated with gathering local information (Bonus, 1996). Consequently, agricultural cooperatives face the first major problem identified by Menard: they must find ways to secure cooperation in order to achieve coordination at low transaction costs without loosing the advantages of decentralized decisions. Portfolio, horizon, control and influence costs problems pose significant constraints and mechanisms are often designed in order to ameliorate their negative consequences (Cook and Iliopoulos, 2000; Chaddad and Cook, 2003). The importance of both formal and informal contracting for cooperatives was already noted in the 1980’s (Shaffer, 1987). Given that most or all contracts are necessarily incomplete, cooperatives have been formed in various industries, countries and historical 11 periods as a transaction cost minimizing structure that avoids the pitfalls of contractual incompleteness (Cook, 1995; Nilsson, 2001). There is no doubt that the implementation of an internal mode of regulation is a crucial issue in agricultural cooperatives. In many cases, internal and external free rider, and multi-principal-agent problems create severe problems. The emergence of new forms of collective action during the last decade has been explained by reference to such constraints (Cook, 1995; Harris et al., 1996). However, additional factors determine the form a cooperative hybrid will adopt. 3.2. Determinants of Cooperative Hybrid Forms An equally important issue in the research on hybrids is the identification of the factors that determine the choice of a particular governance structure. According to the “discrete alignment principle” this choice is made in an effort to align governance structures with exchange attributes so as to minimize transaction costs (Williamson, 1991). Given the existing variety of cooperative hybrid forms, identifying what determines the choice of a specific form becomes crucial. In the literature, two such determinants have been identified (Menard, 2002). 1) Investments and Bi- or Multilateral Dependence Three aspects are particularly relevant for the choice of a specific mode of governance: (i) In cooperatives, monitoring members and other relevant stakeholders is more difficult than in a vertically integrated firm because they remain legally autonomous and responsible for a large set of decisions. (ii) Finding effective mechanisms for solving disputes is an extremely sensitive issue. A number of serious appropriability-related problems may arise. The greater the appropriation 12 concern, which is usually related to specific investments, the more hierarchical coordination mechanisms tend to be. (iii) In order to protect their rents and thus preserve their stability over time, hybrids use two generic strategies. Ex ante, they employ selection processes that act as barriers to entry (e.g., only farmer-members are entitled to voting rights). Such policies may lead to serious difficulties in attracting non-member risk capital. Ex post, they utilize strategies that reinforce mutual dependence. For example, in multipurpose cooperatives, sub-groups of members may be asked to contribute risk capital for investments that will not benefit them directly. While they tend to create portfolio problems, at the same time such tactics reinforce mutual dependence among members. To summarize, the implementation of interdependent investments while separate ownership remains and the intensity of that interdependence reflect in the specific mode of governance chosen, particularly its degree of centralization and formalization. 2) Uncertainty The transactions enforced through hybrids are characterized by a number of uncertainties related to the inputs required by a transaction, the resulting outputs and the institutional environment. An example of uncertainty related to input provision is the set of free riding problems that may result in miscoordination and lack of control over supply. Beyond the sources of uncertainty mentioned above, what matters most in understanding and characterizing hybrid cooperative structures is whether these uncertainties are consequential or not (Menard, 2002). When uncertainty becomes more consequential, contractual hazards become more intense, even in the absence of asset specificity (Menard, 1996). In such cases, tighter coordination is required and thus more control and dependence. In the presence of consequential uncertainty, the POF (i.e., the “government” of the cooperative hybrid) must combine: 13 (i) Adaptation, in order to maintain the flexibility to adjust to unforeseen contingencies. (ii) Control, in order to reduce discrepancies among inputs, outputs, or quality in the process itself. (iii) Safeguards, in order to prevent opportunistic behavior that uncertainties make more difficult to detect in advance. Summarizing, the intensity of needs for adaptation, control and safeguards provides a good predictor of the specific mechanisms that will be used in order to deal efficiently with a particular type of transaction. The perceived risks of opportunism and miscoordination largely determine the mechanisms characterizing cooperative hybrids. When both are present, the governance becomes tighter. 3.3. Cooperative Hybrids as Combinations of Complementary Mechanisms Cooperatives choose governance mechanisms in order to address the aforementioned issues. Economic theory suggests that, when making this choice, hybrids should identify contractual hazards and create contractual provisions to deal with them, protect and distribute gains over time in a sustainable way, and resolve any enforcement issues arising from the arrangement chosen. Contracts for facing contractual hazards Contractual hazards are generated by bilateral dependencies, measurement problems, changing conditions over time, and weaknesses in the institutional environment (Williamson, 1996). In order to deal with contractual hazards, cooperative hybrids must select participating members and define clauses in their bylaws and other formal contracts that can efficiently constrain opportunistic behavior in the form of shirking or hold-up problems. However, contracts remain incomplete and thus complementary safeguards should always be included. These may be formal (e.g., financial hostages in the form of significant up-front equity 14 capital investment) or informal (e.g., relational, reputational and social capital-type of interdependencies). Mechanisms for the distribution of quasi-rents In cooperative hybrids, claiming quasi-rents is as important an issue as creating them (Ghosh and John, 1999). The problem of creating and implementing mechanisms for sharing the gains resulting from the formation of hybrid organizations is rooted in the combination of legally distinct property rights and the difficulty to fully specify ex ante how residual claims will be shared. The reason lies in the fact that the mix of pooled assets and non-observability in cooperatives leaves room for opportunistic behavior (Hansmann, 1996). Empirical work by transaction cost economics scholars suggests that the solution may be a mix of rules based on observable components and non-contractual mechanisms (e.g., Barzel, 1997). Whenever there exists a performance measurement problem, the issue of distributing quasi-rents becomes non-trivial. Three regulating mechanisms are used in such cases: (1) a reputation effect, (2) formal negotiations, and (3) formal authority. The higher the uncertainty on the output and/or the process, the more formal is the mechanism adopted among these three. Enforcement Mechanisms by Cooperative Hybrids The need to combine mutual dependence and sustainability of the relationship in the long-run requires the design of mechanisms for coordinating activities, organizing transactions and solving disputes (Menard, 1996). Such mechanisms may be internal to the arrangement or be enforced by the State (Barzel, 2001). Restrictive provisions included in contracts act as such enforcement mechanisms. One particular point should be emphasized. Most of the literature on agribusiness cooperatives adopts a restrictive view of these provisions by isolating their antitrust consequences (e.g., Sexton, 1990). However, as pointed out twenty years ago, restrictive provisions in contracts 15 (e.g., in cooperative bylaws) act mainly as coordination devises, not as barriers to entry (Williamson, 1996, pp. 183-189). Therefore, member restriction policies by cooperatives should be viewed as coordination enhancing mechanisms and not attempts to generate monopoly rents. Enforcement of hybrid arrangements can also be accomplished through a private administrative entity. This is the case of the cooperative hybrid (an ad hoc institution) operating as a quasi-autonomous entity. Converging empirical studies suggest that the degree of centralization of these “authorities” depends on the degree of mutual dependence and the complexity of the environment in which cooperative hybrids operate (Dwyer and Oh, 1988; Menard, 1996; Park, 1966). To summarize, there seems to exist a significant relationship between transaction attributes and the specific cooperative hybrid mode of governance chosen. However, in order to deal with several puzzling aspects of this relationship, the development of more sophisticated models is required. 4. Conclusion and Recommendations for Future Studies This paper makes a contribution to the theory of the cooperative firm by informing the “cooperative as vertical integration versus as a separate firm” debate. Building on the path breaking work of Menard (2002), it is suggested that cooperatives share the three common characteristics of a hybrid structure: pooling, contracting and competing. Yet, hybrids – including cooperatives – differ in the way mechanisms are crafted to mitigate transaction costs and allow the generation of rents through collective action. The specific form of a hybrid will depend on the nature and intensity of interdependent investments by autonomous units and the specific needs for adaptation, control and contractual safeguards. In addition, complementary mechanisms must be crafted to deal with contractual hazards, to share quasi rents and to enforce and solve disputes. 16 Notwithstanding recent efforts, much remains to be done in the hybrid governance approach to cooperatives. Menard summarizes a set of challenges currently facing research on hybrids, which are applicable to cooperatives: X X X X X Study the vertical coordination strategies of hybrid cooperative organizations along multiple dimensions instead of more traditional approaches. Answer the question: “why do different types of cooperative hybrids coexist in the same industry or market?” Analyze the dynamics of cooperative hybrids, namely, their stability over time and the forces pushing towards change. Study the impact of the institutional environment on the choice of cooperative hybrid mode and its characteristics. Study the relevance of various antitrust policies towards hybrids. Given the variety of discrete hybrid cooperative organizations, understanding why and what makes them viable substitutes to alternative modes of governance becomes imperative. The complexity of cooperative hybrids should not discourage scholars interested in providing answers to the aforementioned challenging problems; it is worth the effort. 5. References Banerjee, A. D., Mookherjee, D., Munshi, K., and D. Ray (2001) “Inequality, Control Rights, and Rent-Seeking: Sugar Cooperatives in Maharashtra.” Journal of Political Economy, 109(1): 138-190. Barzel, Y. (2001) “A Theory of Organizations to Supersede the Theory of the Firm.” ISNIE 2001, Berkeley, CA. Available at: http://www.isnie.org. Barzel, Y. (1997) Economic Analysis of Property Rights, Second Edition. New York: Cambridge University Press. 17 Bonus, H. (1986) “The Cooperative Association as a Business Enterprise: A Study in the Economics of Transactions.” Journal of Institutional and Theoretical Economics 142: 310-339. Chaddad, F.R. and Cook, M.L. (2003). “Understanding New Cooperative Models: An Ownership-Control Rights Typology,” Review of Agricultural Economics, 25(2): in press. Cook M. L., and Iliopoulos C. (2000) “Ill-defined Property Rights in Collective Action: The Case of US Agricultural Cooperatives.” In C. Menard (ed.) Institutions, Contracts, and Organizations: Perspectives from New Institutional Economics, pp. 335-348. Edward Elgar Publishing: London. Cook, M. L. (1993) “Cooperatives and Group Action.” In D. Padberg (ed.) Food and Agricultural Marketing Issues for the 21st Century, pp. 154-169, College Station, TX: Texas A&M University. Cook, M. L. (1995) “The Future of U.S. Agricultural Co-operatives: A Neo-Institutional Approach.” American Journal of Agricultural Economics 77 (December): 11531159. Cook, M. L., Iliopoulos, C., and F. R. Chaddad (forthcoming) “Cooperative Theory: A New Institutional Economics Approach.” In. D. Cobia, D. Barton, and B. Anderson (eds.) Cooperatives: An Economic and Management Perspective, New Jersey: Prentice-Hall. Dwyer, F. R., and S. Oh (1988) “A Transaction Cost Perspective on Vertical Contractual Structure and Interchannel Competitive Strategies.” Journal of Marketing, 52: 21-34. Emelianoff, I. V. (1942) Economic Theory of Cooperation. Ann Arbor: Edward Brothers. 18 Enke, S. (1945) “Consumer Cooperatives and Economic Efficiency.” American Economic Review, 35(1): 148-155. Ghosh, M., and G. John (1999) “Governance Value Analysis and Marketing Strategy.” Journal of Marketing, 63: 131-145. Grossman, S. J., and O. D. Hart (1986) “The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration.” Journal of Political Economy, 94: 691-719. Hansmann, H. (1996) The Ownership of Enterprise. Cambridge, MA: The Belknap Press of Harvard University Press. Harris, A., Stefanson, B., and M. Fulton (1996) “New Generation Cooperatives and Cooperative Theory.” Journal of Cooperatives, 11: 15-28. Hart, O., and J. Moore (1990) “Property Rights and the Nature of the Firm.” Journal of Political Economy, 98: 1119-1158. Helmberger, P. G. and S. Hoos (1962) “Cooperative Enterprise and Organization Theory.” Journal of Farm Economics, 44: 275-290. Hendrikse, G. W. J. (1998) “Screening, Competition and the Choice of the Cooperative as an Organizational Form.” Journal of Agricultural Economics, 49(2): 202-217. Hendrikse, G.W.J. and Bijman, J. (2002), “Ownership Structure in Agrifood Chains: The Marketing Cooperative,” American Journal of Agricultural Economics, 84(1): 104-19. King, R. P. (1992) “Management and Financing of Vertical Coordination: An Overview.” American Journal of Agricultural Economics, 74(5): 1217-1218. Lazzarini, S., Chaddad, F., and M. Cook (2001) “Integrating Supply Chain And Network Analyses: The Study Of Netchains.” Journal on Chain & Network Science, 1: 7-22. 19 Madhok, A., and S. B. Tallman (1998) “Resources, Transactions and Rents: Managing Value Through Interfirm Collaborative Relationships.” Organization Science, 9(3): 326-339. Menard, C. (1996) “On Clusters, Hybrids and Other Strange Forms. The Case of the French Poultry Industry.” Journal of Institutional and Theoretical Economics, 152(1): 154-183. Menard, C. (2002) “The Economic of Hybrids Organizations.” Presidential Address, ISNIE 2002, MIT, September 29. Available at: www.isnie.org. Nilsson, J. (2001) “Farmer Co-operatives—Organisational Models and Their Business Environment.” In J. Birchall (ed.) The New Mutualism in Public Policy, pp. 132-154, London: Routledge. Park, S. H. (1996) “Managing an Interorganizational Network: A Framework of the Institutional Mechanism for Network Control.” Organization Studies, 17(5): 795-824. Peterson, C. H., Wysocki, A., and S. B. Harsh (2001) “Strategic choice along the vertical coordination continuum.” International Food and Agribusiness Management Review, 4: 149-166. Phillips, R. (1953) “Economic Nature of the Cooperative Association.” Journal of Farm Economics, 35: 74-87. Raynaud, E., Sauvee, L., and E. Valceschini (2002) “Quality Strategies and Producers’ Organization in the European Agro-food Sector: Competition Policy and Consumer Information. A General. Survey.” Working Paper, INRA, 132 pp. Reardon, T., and C. Barrett (2000) “Agroindustrialization, globalization, and international development: An overview of issues, patterns, and determinants.” Agricultural Economics, 23: 195-205. 20 Robotka, F. (1957) “A Theory of Cooperation.” In M. A. Abrahamsen and C. L. Scroggs (eds.) Agricultural Cooperation: Selected Readings, pp. 121-142. Minneapolis: University of Minnesota Press. Sauvee, L. (1997) “Managing a Brand in the Tomato Sector: Authority and Enforcement in a Collective Organization.” Acta Horticulturae, 536: 537-554. Sauvee, L. (1998) “Toward an Institutional Analysis of Vertical Coordination in Agribusiness.” In Royer, J. and R. Rogers (eds.) The Industrialization of Agriculture, Aldershot, England: Ashgate Publishing Co. Sexton, R. J. (1984) The Formation of Cooperatives: An Analysis of Entry Incentives, Entry Deterrence, Optimal Financing Arrangements, and Stability Requirements. Unpublished Ph.D. Dissertation, University of Minnesota. Sexton, R. J. (1990) “Imperfect Competition in Agricultural Markets and the Role of Cooperatives: A Spatial Analysis.” American Journal of Agricultural Economics 72(3): 709-20. Sexton, R. J., and J. Iskow (1988) Factors Critical to the Success or Failure of Emerging Agricultural Cooperatives. Giannini Foundation Information Series, NO. 88-3, University of California. Shaffer, J. D. (1987) “Thinking about Farmers’ Cooperatives, Contracts, and Economic Coordination.” In J. Royer (ed.) Cooperative Theory: New Approaches, pp. 6186, ACS Report 18, USDA. Shaffer, J. D., and J. M. Staatz (1986) “Potential Coordinating Functions of Farmer Cooperatives.” In L. F. Schrader and W. D. Dobson (eds.) Farmer Cooperatives for the Future. Proceedings of a Workshop, November 4-6, 1985, St. Louis, MO. Department of Agricultural Economics, Purdue University. 21 Sporleder, T. L. (1992) “Managerial Economics of Vertically Coordinated Firms.” American Journal of Agricultural Economics, 74(5): 1226-1231. Staatz, J. M. (1987) “A Game Theoretic Analysis of Decionmaking in Farmer Cooperatives.” In Cooperative Theory: New Approaches, ed. Jeffrey S. Royer, 117-147. Washington, D.C.: USDA ACS Service Rep. 18, July. Staatz, J. M. (1989) Farmer Cooperative Theory: Recent Developments. ACS-USDA Research Report # 84, USDA. Sykuta, M. E., and M. L. Cook (2001) “A New Institutional Economics Approach to Contract and Cooperatives.” American Journal of Agricultural Economics, 83(5): 12711277. Teece, D., and G. P. Pisano (1994) “The Dynamic Capabilities of Firms: An Introduction.” Industrial and Corporate Change, 3(3): 537-556. Williamson, O. E. (1991) “Comparative Economic Organization: The Analysis of Discrete Structural Alternatives.” Administrative Science Quarterly, 36(2): 269-296. Williamson, O. E. (1996) The Mechanisms of Governance. New York: Oxford University Press. Zusman, P. (1992) “Constitutional Selection of Collective-Choice Rules in a Cooperative Enterprise.” Journal of Economic Behavior and Organization, 17: 353-362. 22