Do quality incentive payments improve cooperative performance? The case of small French agricultural cooperatives

Abstract Small agricultural cooperatives are increasingly using differentiated payments based on the quality of their members’ products. Such cooperatives make a trade‐off between the return on investment in quality and members’ disengagement from the cooperative. Based on data from the five‐year survey of small French agricultural cooperatives, we analyse the effect of incentive payments on small cooperatives’ performances. We investigate how incentive payments can reduce the problem of free riders and improve these cooperatives’ reputation. Using a quantile regression method, while controlling for the potential endogeneity of incentive payments, we show that quality‐based compensation can rule out cooperative members’ defrauding options. This remuneration has a non‐linear positive effect on small cooperatives’ performances. The results suggest that incentive payments improve small cooperatives’ performances.