Decision Making Among Heterogeneous Members: A Study on Economic Efficiency under the Centralized Structure of Chinese Farmer Professional Cooperatives

Farmer cooperatives are playing an increasingly crucial role in the current reform of the agricultural sector in China. Two features of these organizations have stood out amidst the undergoing, rapid development. One is the highly concentrated decision-making structure, while the other being the high level of member heterogeneity in terms of production capacity and ownership portion. Current literature has few quantitative models for analyzing the effects of governance centralization and member heterogeneity on cooperative economic efficiency. This article focuses on evaluating the efficiency of decisions made under different voting structures when members are highly heterogeneous. We use a net income model for a two-stage investment decision. We find that members with a larger ownership in a Chinese cooperative tend to have better aligned interest with the organization and can make more efficient decisions relative to those with less ownership. When heterogeneity among members is high, a more centralized decision making structure can lead to higher economic efficiency. Additionally, because the optimal level of centralization is determined by the redistribution policy of cooperative profits and properties of member heterogeneity, different cooperatives would accordingly have different optimal degrees of centralization.