Weaknesses in Institutional Organization: Explaining the Dismal Performance of Kenya's Coffee Cooperatives

In this paper, we use the experience of Kenya's failing Coffee Cooperatives to show that, under certain circumstances, membership based organizations can give rise to perverse incentives that undermine the benefits of organizing and lead to a reduction in member productivity and welfare. We identify certain features of the institutional environment underlying Kenya's coffee cooperatives that facilitate rent-seeking behavior. The lack of a formal regulatory structure with credible enforcement mechanisms, the presence of informal electoral practices conducive to vote-buying, and the legal support for local monopsonies that facilitates exploitive pricing all contribute to the dismal performance of Kenya's coffee cooperatives. Using a data set of more than 200 coffee farmers representing nine cooperatives, we find a statistically significant relationship between cooperatives empirically determined to be corrupt and high levels of technical inefficiency in coffee production among their members.