Social interactions and product quality: the value of pooling in cooperative entrepreneurial networks

Abstract

Why do cooperatives often pay a pooled price, despite the free-riding incentives it entails? In this paper, we highlight that a cooperative is an enterprise owned by a network of entrepreneurial members. By taking explicitly into account the social interactions among entrepreneurial members and the impact of social ties on members’ product quality provisions, we identify the circumstances when pooling is efficient. It is shown that social interactions mitigate the free-riding effect of pooling and that the amount of members’ social interactions depends upon, and increases with, the cooperative’s pooling ratio. We show that the complete pooling policy is not only economically efficient but also socially advantageous when the context of the cooperative is conducive to frequent social interactions among members.