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Abstract
Farmer cooperatives are playing an increasingly crucial role in the current reform of the
agricultural sector in China. Two features of these organizations have stood out amidst the
undergoing, rapid development. One is the highly concentrated decision-making structure, while
the other being the high level of member heterogeneity in terms of production capacity and
ownership portion. Current literature has few quantitative models for analyzing the effects of
governance centralization and member heterogeneity on cooperative economic efficiency. This
article focuses on evaluating the efficiency of decisions made under different voting structures
when members are highly heterogeneous. We use a net income model for a two-stage investment
decision. We find that members with a larger ownership in a Chinese cooperative tend to have
better aligned interest with the organization and can make more efficient decisions relative to
those with less ownership. When heterogeneity among members is high, a more centralized
decision making structure can lead to higher economic efficiency. Additionally, because the
optimal level of centralization is determined by the redistribution policy of cooperative profits
and properties of member heterogeneity, different cooperatives would accordingly have different
optimal degrees of centralization.