Emergence of Cooperatives and Farmer Heterogeneity

Abstract: The relationship between farmers’ heterogeneity and the pattern of emergence of a cooperative is studied in a non-cooperative game where farmers choose to become active, or stay passive, in the formation of a cooperative. Our results show that when heterogeneity is limited, a cooperative emerges bottom-up by all farmers taking an initiative. With moderate heterogeneity, one of the farmers takes a lead in the emergence of a cooperative. With high heterogeneity, no cooperative emerges. Next, we identify a role for a third party by considering a selfish outsider, such as the “dragonheads” in China, and a benevolent outsider, such as NGOs. When the value of a selfish outsider is high (intermediate, low), then a cooperative emerges top-down (top-down or does not emerge, bottom-up with one active farmer or does not emerge). When the value of a benevolent outsider is sufficiently high, he is more effective at eliminating the coordination and hold-up problems among the farmers than a selfish outsider. Farmers become most active when the type of the outsider is benevolent with high value.