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Impact of Third-Party Enforcement of Contracts in Agricultural Markets–A Field Experiment in Vietnam

Author

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  • Saenger, Christoph
  • Torero, Maximo
  • Qaim, Matin
Abstract
Asymmetry of information is a fundamental problem in agricultural markets. Production contracts remain incomplete if product quality attributes measured by the buying company remain unobservable for the selling farmer. Opportunistic buyers would report lower than actual output quality, negatively affecting farmers’ compensation given it is directly linked to quality. When farmers factor in the buyer’s opportunistic behavior, underinvestment may occur, negatively affecting farm productivity. Using the example of the Vietnamese dairy industry, a field experiment is conducted in which randomly selected dairy farmers are entitled to independently verify milk testing results. Farm-level output data are complemented with household information from two rounds of comprehensive surveys conducted before and at the end of the intervention. We find a 10 percent higher use of inputs for treatment farmers, also resulting in significantly higher dairy output; welfare levels increase for a specific subgroup of farmers. As the buying company had not underreported output quality despite the existing information asymmetry, third-party enforcement enabled the company to credibly signal its fair type to farmers, leading to a Pareto improvement in the supply chain. While producers benefit directly from higher farm productivity, buying companies are better off due to lower per-unit transaction costs when procuring the farm output.

Suggested Citation

  • Saenger, Christoph & Torero, Maximo & Qaim, Matin, 2012. "Impact of Third-Party Enforcement of Contracts in Agricultural Markets–A Field Experiment in Vietnam," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124628, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea12:124628
    DOI: 10.22004/ag.econ.124628
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    References listed on IDEAS

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    1. Tomislav Vukina & Porametr Leegomonchai, 2006. "Oligopsony Power, Asset Specificity, and Hold-Up: Evidence from the Broiler Industry," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(3), pages 589-605.
    2. Shawn Cole & Xavier Gine & Jeremy Tobacman & Petia Topalova & Robert Townsend & James Vickery, 2013. "Barriers to Household Risk Management: Evidence from India," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 104-135, January.
    3. Michael E. Sykuta & Michael L. Cook, 2001. "A New Institutional Economics Approach to Contracts and Cooperatives," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(5), pages 1273-1279.
    4. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    5. Elizaphan J. O. Rao & Bernhard Brümmer & Matin Qaim, 2012. "Farmer Participation in Supermarket Channels, Production Technology, and Efficiency: The Case of Vegetables in Kenya," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(4), pages 891-912.
    6. Throsby, David, 1994. "The Production and Consumption of the Arts: A View of Cultural Economics," Journal of Economic Literature, American Economic Association, vol. 32(1), pages 1-29, March.
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    Cited by:

    1. Sandip Mitra & Dilip Mookherjee & Maximo Torero & Sujata Visaria, 2018. "Asymmetric Information and Middleman Margins: An Experiment with Indian Potato Farmers," The Review of Economics and Statistics, MIT Press, vol. 100(1), pages 1-13, March.
    2. Nicholas Minot & Loraine Ronchi, 2014. "Contract Farming," World Bank Publications - Reports 24249, The World Bank Group.
    3. Johan Swinnen, 2016. "Value Chain Innovations for Technology Transfer in Developing and Emerging Economies: Concept, Typology and Policy Implications," Working Papers id:10694, eSocialSciences.
    4. Romero, Cristina & Wollni, Meike, 2015. "Supplier dynamics in horticultural export chains – Evidence from Ecuador. Revised version," GlobalFood Discussion Papers 209961, Georg-August-Universitaet Goettingen, GlobalFood, Department of Agricultural Economics and Rural Development.
    5. Qaim, Matin & Andersson, Camilla I.M. & Chege, Christine G.K. & Kimenju, Simon Chege & Klasen, Stephan & Rischke, Ramona, 2014. "Nutrition Effects of the Supermarket Revolution on Urban Consumers and Smallholder Farmers in Kenya," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 177204, Agricultural and Applied Economics Association.
    6. Torero, Maximo & Viceisza, Angelino C.G., 2016. "Potential collusion and trust: Evidence from a field experiment in Vietnam," African Journal of Agricultural and Resource Economics, African Association of Agricultural Economists, vol. 11(01), pages 1-11.
    7. Bernard, Tanguy & Hidrobo, Melissa & Le Port, Agnès & Rawat, Rahul, 2017. "Nutrition incentives in dairy contract farming in northern Senegal," IFPRI discussion papers 1629, International Food Policy Research Institute (IFPRI).
    8. Ochieng, Dennis O. & Veettil, Prakashan C. & Qaim, Matin, 2017. "Farmers’ preferences for supermarket contracts in Kenya," Food Policy, Elsevier, vol. 68(C), pages 100-111.
    9. repec:lic:licosd:37616 is not listed on IDEAS

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    More about this item

    Keywords

    Agribusiness; Institutional and Behavioral Economics; International Development;
    All these keywords.

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets

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