Transaction cost theory and the establishment of statutory marketing boards for the primary sector : an application to the New Zealand goat fibre industry

Abstract

The objective of this study was to establish a theory able to explain the reasons for the formation of horizontal associations in primary product industries. It was felt that such work would help to understand why such formations often request government intervention to establish statutory marketing boards. Such insights would be of use in assessing whether government intervention is truly necessary and what benefits may accrue to the industry as a whole from such a move. The transaction cost theory, where it is hypothesised that individuals aim to minimise their combined transaction costs and agency costs, was considered the most promising of the alternative theories. In light of this two groups of hypotheses were proposed. Firstly, it was proposed that many demographic details of each individual's production unit would affect that individual's costs and therefore their willingness to join the organisation. Secondly, it was considered that producer organisations existed to undertake certain activities on behalf of each individual producer. Therefore, an individual's willingness to be part of that organisation was expected to be related to their perception of the manner in which these activities were being performed and therefore the decreased costs they would be likely to obtain. To undertake the analysis the New Zealand goat fibre industry was used. This is a young industry comprising of three organisations MOPANZ, CAPRONZ and the Mohair/Cashmere Warehouse. The demographic information felt to be most likely to affect an individual's support of each particular organisation was outlined for this industry. Such information included the reasons each individual bred goats, the level of off-farm income the received and the proportion of each goat individual fibre type (cashmere, mohair or cashgora) produced. An individual's perception of the activities undertaken by any of the organisations in which that individual is eligible to participate was also obtained. For both MOPANZ and CAPRONZ the activities undertaken are largely information. For the Mohair/Cashmere Warehouse mainly selling activities and marketing to the overseas clients were expected to be carried out. The aim was to analyse this information against each individual's willingness to pay the cost of joining each organisation. If the transaction cost theory does effectively explain why individuals choose to join an organisation it is expected that each individual's willingness to pay to join each organisation will be affected by their demographics along with their perception of the activities undertaken. The results of this analysis suggest that the transaction cost theory may prove useful in understanding why producer organisations form and consequently why government intervention is often requested. For the few unexpected results arising an explanation is offered. In Section 8 conclusions of the study are provided and the limitations of the study are outlined, along with suggested directions for future research. It is concluded that government intervention is often sought to minimise transaction and agency costs to the producer organisation. As this is likely to result in increased costs to each individual producer and inflexibility in the channel, overall efficiency will be decreased. For this reason it is suggested that government intervention should not take place.