Acknowledgements

Economies of Scale Versus Participation: a Co-operative Dilemma?

Jones, D.C.; Kalmi, P.

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developments, once underway, are difficult to reverse. in particular they document how co-op members are 

highly sceptical of the ability of co-op leadership to introduce changes that lead to significantly enhanced 

member control. As such they echo the findings of many earlier studies such as Hind et al. (1997).

7

 

However, their study relates only to one sector of co-operatives and therefore may not be representative for 

all types of co-operatives. Also, there appear to be many examples when tensions between members and 

managers and between members and boards have subsequently been radically diminished. For example, 

Workshop report, (2007) discusses the case of co-operative regeneration in Fonterra in New Zealand and 

how, after a series of governance scandals in UK co-operatives in the 1990s, a new code of best practices was 

adopted and how this is believed to have led to several subsequent examples of co-operative regeneration. 

A second set of issues surrounds the basis and incentives for membership in a co-op. in many co-

ops apparently this is a straightforward matter. Thus in consumer co-ops all users (buyers) are eligible 

for membership and members typically receive rewards proportional to their co-op activities (such as 

purchases.) Similar situations exist in agricultural co-ops and many banking co-ops (e.g. in Finland). But 

the transparency of rewards and mechanisms for determining rewards varies even among a given type of 

co-op. Hence in U.S. credit unions rewards for membership are implicit-members do not share in surplus 

but rather benefit, for example, from lower lending and higher deposit rates. And even within what seem to 

be “simple” co-ops, the issues are often more complex than initially appears. Thus in some consumer coops, 

while a crucial task is a need to provide democracy for consumer members, often there are other groups who 

are eligible for membership, for example employees, whose interests need to be accommodated. Devising 

democratic arrangements that balance the needs of differing groups is often a challenge. in worker co-ops 

the problems may be even more difficult to resolve. For example, will co-op membership be available to all 

workers--the principle of free admission (Estrin and Jones, 1992) -- or do other arrangements prevail? And 

when there are multiple classes of members how are voting rights and rewards (and on what basis) to these 

differing groups to be determined? Such matters potentially constitute formidable democratic challenges.

A co-operative may influence the demand for membership by many things. These include the general 

performance of the co-operative, the quality of the services provided by the co-operative and its pricing 

attractiveness, its membership policy, and the structure of co-operatives. Other things equal, well-managed 

and –reputed co-operatives are more attractive to join. For many potential members, the key factor in joining 

is pricing and quality. in consumer co-operatives, high quality goods and services that are competitively 

priced attract consumers to join the co-operative. Similarly, in worker co-operatives, the attractiveness of 

the co-operative as an employer depends on a combination of working conditions and salary, including the 

riskiness of the income stream as well as the degree of job security.

 There are important differences in the membership policies of co-operatives. in some co-operatives, 

notably credit unions, all (individual) customers are required to become members. in most co-operatives, 

however, individuals have a choice as to whether they want to become members. in these cases, the policies 

of a co-operative often have a decisive role in member recruitment. For instance, a co-operative may decide 

whether to spend resources on informing customers on membership and to what degree; whether it is easy 

to join the co-operative or not; and what the pecuniary and non-pecuniary benefits are from membership. 

The size of the co-operative is also likely to matter. in large co-operatives and/or in co-operatives with 

multiple membership classes, the members are likely to experience a lower degree of common bond, having 

fewer opportunities to influence the policies of the co-operative, and being under lower social pressure to 

participate in the governance of the co-operatives. Emmons and Schmid (1999) and Jones, Jussila and 

7

  in the context of credit unions, Hoel (2011) has similarly argued that members’ sense of ownership and the size of the credit 

union are inversely related. 

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Economies of Scale Versus Participation: a Co-operative Dilemma?

Jones, D.C.; Kalmi, P.

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JEOD - Vol.1, Issue 1 (2012)

Kalmi (2009) explore further such trade-offs. 

in the extreme, the current members may close the co-operative to new members, which will obviously 

cause the membership to decline. This is known as co-operative degeneration and, over time, will lead 

to conversion into a normal company, unless regeneration occurs. This has been a recurring theme in 

the economics literature on worker co-operatives that has followed the pioneering work of Ward (1958) 

and later Vanek (1970) where worker co-operatives are positioned within a standard microeconomic 

(comparative static) framework and it is argued they maximize income per member.

8

 One set of issues in 

that literature concerns the comparative scarcity of worker co-operatives. Why, apparently, are such firms 

rare (compared to conventional investor-owned firms)? As well as leading to examination of issues relating 

to formation, this area is also concerned with matters surrounding survival and life cycle. in turn one of the 

themes that is identified in this connection is the apparent difficulty co-operatives have in sustaining their 

democratic character.

Beginning with the work of the Webbs (e.g. Potter, 1891) and continuing with formal economic 

modeling by, amongst others, Ben-Ner (1984), researchers have analyzed the tendency of producer co-

operatives to transform themselves into organizations within which control rights are vested in a small 

number of worker-members. The key prediction is that, over time, PCs have a tendency to “degenerate” 

(see, e.g. Ben-Ner, 1984.) Democracy is undermined because the incentive grows for worker-members 

to replace retiring members with employees who remain non-members; consequently, the fraction of the 

workforce that comprises members will inexorably decline. Another “degeneration” prediction is that 

successful co-ops will end up being sold to private corporations.

Unwillingness to take in new members is a consequence of the fact that existing members are not 

compensated for the dilution of their ownership rights. in principle, tradable membership rights would 

eliminate this problem. However, there are several reasons why such markets are difficult to establish. One 

reason is that there might be principle-based opposition to market valuation of membership shares; high 

prices for membership may deter new members from joining, thus clashing with the “open membership” 

principle of co-operatives. Even where such markets are established, informational problems, including 

asymmetric information and thinness of markets, make valuing such rights very difficult (Dow 2003). 

Perhaps more importantly, degeneration can be halted by establishing institutional rules that require 

that employees should be taken as members after a probationary period (as in France, see Perotin 1997) or 

by setting a limit to the maximum proportion of non-members among the workforce (as in Mondragon, 

Smith 2001; Arando et al, 2011a).

 

in any case, degeneration is a problem that mostly relates to worker 

co-operatives and it is fundamentally due to the combination of facts that the value of membership can 

be relatively high and the productivity differential between member and non-member workers may be 

low. Conversely, in consumer co-ops, where the value of membership is relatively low but the behavioral 

differences between members and non-members may be high, degeneration is typically not an issue.

9

However, the two types of democratic challenges do not always need to be in conflict. When a co-

operative encounters economies of scale, and membership produces a positive behavioral response (e.g. 

members are more loyal towards the co-operative than non-members), then incumbent members may 

actually benefit from allowing new members to join the co-operative, even when the membership fee is 

nominal.   

8

  Note that the main institutional impetus for the emergence of this theoretical literature was the perceived behavior of the 

yugoslav firm during the Tito era.

9

  Degeneration may well be an issue for other types of co-operatives as well. Thus some agricultural co-ops with large investment 

needs, may close membership in order to align incentives to value maximization and prevent free-riding, 

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