Do Cooperatives Offer High Quality Products? Theory and Empirical Evidence from the Wine Market

We investigate the impact of decentralised decision making on product quality. Comparing a cooperative (decentralized decision making) and a firm (centralized decision making) suggests that members of the cooperative have an incentive to produce too much and to free-ride on quality. Free-riding on quantity and quality are interrelated which implies that the final product of the cooperative can even be of higher quality than its entrepreneurial twin, despite free-riding on quality. Whether or not cooperatives deliver higher quality products depends on the way in which the quality of the final product is determined from the quality levels of the inputs delivered (quality aggregation) as well as the number of members of the cooperative. Empirical evidence on the Austrian wine market suggests that wines produced by cooperatives tend to be of significantly lower quality, ceteris paribus.