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Abstract
The horizon problem has long been identified as being important to the
functioning and behavior of cooperatives. This paper shows that the
investment disincentive that a cooperative (both at start-up and ongoing) has
vis-à-vis an IOF is less severe than has been typically argued. There are two
main findings. The first is that the standard intuitive understanding of the
effect of different horizons typically starts from the implicit assumption that
cooperative members have the same objective as their IOF counterparts.
When this assumption is relaxed it is shown that even when the horizon
problem is at its most severe (e.g., during the creation of a cooperative by
the original members), the cooperative may – under certain conditions – be
more likely to make an investment than a profit-maximizing IOF. The
second key finding is that once the cooperative is operating, the horizon
problem is mitigated by the open membership policy of cooperatives.
However, the open membership policy, which specifically does not assign
property rights to specific groups, is not one that is chosen as an equilibrium
strategy by the members. Instead, it is a policy that is adopted on the basis of
principle. To sustain this policy, the cooperative needs to maintain features
such as a strong identity that serve to make deviation from the open
membership principle difficult.