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Incentivising production quality in cooperative agriculture: Evidence from Indian dairy cooperatives

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Small-scale agriculture is extremely common in developing countries, where the vast majority of farms are family-owned and under five hectares. To increase their reach, smallholder farmers commonly form local cooperatives, with shared rules on production parameters and a mutually agreed allocation of surplus.

Within cooperative agriculture, contracts that offer incentives for quality upstream can increase downstream value-added (Bellemare and Bloem 2018). This mechanism is complicated in cooperative agriculture by the fact that while contracts are written at the group level, production is carried out by individual farmers, leading to possible challenges in internally coordinating the behavior of group members.

As a result, many agricultural cooperatives organize around existing social networks, which have been shown to sustain internal coordination through informal channels (Ostrom 1990). In particular, cooperative managers play an important role in setting incentives and enforcing compliance with internal standards. Recent evidence from Colombia (Macchiavello and Miquel-Floensa 2019) and Indonesia (Treurniet 2021) demonstrates empirically that group-level contracts can alter production outcomes in cooperative agriculture.

The gains to value added can also improve rural incomes if the returns to quality upgrading pass upstream to smallholder producers. In general, agricultural cooperatives generate surplus that is shared by member producers (Macchiavello and Miquel-Floensa 2019, Hill et al. 2021). However, the distribution of group surplus can be influenced by elite members (Banerjee et al. 2001), who frequently both serve as cooperative managers and occupy positions of privilege in the broader social network. Elite capture may thus limit the extent to which aggregate returns benefit more marginal cooperative members.