We consider the successful early emergence of cooperative creameries in Denmark in the late nineteenth century within the framework of the “new institutional economics” presented by Oliver Williamson. Previous work focused on the social cohesion of the Danes, but we demonstrate that this was not sufficient for their success. The Danish legal system, which we compare to that of other countries, was also of crucial importance, along with the way in which rules were monitored and enforced. Of particular interest is the Danish cooperatives’ use of contracts, which we explore with evidence from a variety of primary and secondary sources.

We consider the relative contributions of changing technology and institutions for economic growth through the investigation of a natural experiment in history: the almost simultaneous introduction of the automatic cream separator and the cooperative ownership form in the Danish dairy industry from around 1880. Using a new database of statistics from creameries and the tool of stochastic frontier analysis, we find that both institutions and technology were important for the success of the Danish dairy industry and, by implication, the growth and early development of the Danish economy.

During the late nineteenth century, technologies to measure the quality of the milk in butter production became available, enabling creameries to pay suppliers of raw milk according to quality. Having identified the advantages to the creameries in terms of incentive provision, we demonstrate that the diffusion among the cooperative creameries was relatively slow, particularly relative to other technologies adopted by the same creameries over the same period, with a large number ‘dragging their feet’. We also observe that late adopters often do not choose the most up-to-date technology and that early adopters who later upgrade their technology in many cases do not choose the current best practice. We consider a number of reasons for the observed patterns, which are at odds with the co-operative creameries being seen as technologically ‘savvy’. A proper implementation created both winners and losers among suppliers, and the size of these widened with newer versions of the technology. We show that the slow and inappropriate implementation can be explained by the need to get the technology accepted by a sufficient number of suppliers.

The paper investigates the initial phase of the cooperative organisation of agricultural processing firms in Denmark. It argues that the variations observed can be explained within the framework of the theory of industrial organisation. The focus is on the success of cooperative creameries. In 1903, twenty years after the first establishments, the owners of about 80 per cent of all Danish milch cows supplied their product to a cooperative. The success of cooperatives within other fields of production was smaller by comparison. The point is that dairying cooperatives, given the existing technology of gathering information and of preserving and transporting a perishable product, were ideally suited to overcome the problems of potential lock-in and of asymmetric information.