Managing Contractual Risk Through Organization: Strategic Vs. Consensual Networks

This paper presents a study of the economic organization of systems of financial cooperatives (FC). It suggests a theoretical framework rooted in principles of transaction cost economics that seeks to explain empirical regularities observable in systems of FC worldwide, and compares the Quebec Desjardins Movement (DM) and the Ontario Credit Union system, two networks with different degrees of development.The paper argues that strategic networks:

• Are a superior form of governance mechanism;
• Provide a substitute control mechanism when the size of the institution dilutes internal governance mechanisms;
• Discourage sub-goal pursuits, expense preferences and economize on bounded rationality occurring in large FC.

The paper generates a set of testable hypotheses of which it tests the following three:

• Over a range of small FC, differences in efficiency will be relatively small;
• Large independent organizations should display systematically lower efficiency than similar sized FC members of strategic networks;
• FC in strategic networks should display lower variance in size as well as in performance indicators.

The authors state that:

• Their empirical results are consistent with the suggested theoretical propositions;
• Opponents to networks state that the benefits associated with the financial services offered to large sectors of the population come at a heavy price;
• The success of DM in servicing its vast and rural clientele comes at a price.

The paper concludes by stating that even paying this price, the DM outperforms the OCU system.