Coordinating for Quality and Organization: A Theoretical Model and Empirical Findings

The theoretical section of the paper presents a formal model illustrating how cooperatives and private firms can coexist within a market while obtaining different quality rewards. The basic intuition follows from the literature on firm boundaries determined via incomplete contracts where organizational forms, when agreed upon competitively, condition the sense of entitlement of the parties. If feeling aggrieved by the outcome of the contract, parties may shade by underperforming, which creates deadweight losses. The main result obtained states that if the intensity of shading depends positively on the existing payoff imbalances between bosses and managers, then (non)integration with coordination is more plausible when the profits of bosses and benefits of managers are (dis)similar. Moreover, given some plausible parameter constraints, social surplus tends to be higher under integration whenever coordination takes place. These results illustrate that both organizational forms, an integrated cooperative and a nonintegrated private firm, may coexist in a coordinated equilibrium and how the former may even obtain a higher social surplus than the latter one. When applied to our empirical setting, this result leads us to conclude that similar interests between both parties, the boss and the unit managers, strengthened by the shared regional DOC denomination, would lead to a small value of shading, which encourages coordination within a cooperative (integrated) environment. On the other hand, privately emphasizing a dominant brand over the rest obtaining an IGT denomination premium results from dissimilar interests between the parties, which leads to a nonintegrated though coordinated equilibrium scenario. In the empirical section we analyze a data set for cooperative and private wineries from Northern Italy (Alto Adige and Trentino). We first use a hedonic model to test whether wines from private wineries receive a wine quality premium and/or a reputation premium for ownership structure relative to cooperatives. For Alto Adige, we estimate a significantly positive reputation premium and a higher quality premium for wines produced by cooperatives. For the Trentino, we estimate a significant reputation premium for private wineries but higher quality premium for wines produced by cooperatives. In a second model, we include interaction terms between quality denominations (IGT/DOC) and organizational form (i.e. Coop/Non-Coop) to see if there is any strategic orientation towards specific denomination rules and organizational forms. Our expected result is that cooperatives concentrate on regional DOC rules while private wineries increasingly turn to a strategy of marketing and branding distinctly different IGT wines. We test this hypothesis estimating a modified equation on the whole sample with DOC wines produced by cooperatives selected as base category wines. The estimated coefficients indicate that cooperatives may emphasize DOC production and use IGT denomination for lower quality grapes, while private producers tend to use IGT to market distinctly different wines often with specific brand names.