University of Toronto
Contract farming is a widespread practice in the developing world and is a means by which farmers get access to credit for inputs and consumption as well as a market for their output. The providers of the credit benefit as the use of better inputs ensures better quality produce. These contracts are often informal word of mouth contracts and, as a result, there are numerous hurdles which must be overcome in order for them to function successfully. For example, the farmer may misuse the loans provided for inputs in non-production activities or she may choose to default on the loan entirely by side selling to a buyer other than the with whom she has contracted. We develop a relational contracting model which highlights the conditions under which contract farming can function successfully despite these issues. We show that under different situations, the nature of the profit maximizing contract varies- credit is either provided in-kind or as a combination of in-kind and cash. We provide case evidence from the literature in support of our results.
The model is employed to explain the dramatic rise in contract farming amongst Ghanaian pineapple farmers over 1996-2001. Contracting emerged after a technological innovation in the market- sea shipping became available in 1996 which had lower cost than air freight. However, sea shipping involved much longer transit times which meant that, unlike under air freight, the quality of the fruit was no longer observable at the time of shipment. Using our model, we argue that this change in observable quality facilitated contracting by altering farmers' default incentives. In this way, the theory we develop shows how credit arrangements can arise spontaneously, absent non-market interventions, in response to a change in market conditions.
Date: August 11, 2011
Time: 03:00 P.M.
AMEX Conference Room (Second Floor),
Department of Economics,
Delhi School of Economics,
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