A Financial Contracting Approach to the Role of Supermarkets in Farmers' Credit Access

In developing countries, moneylenders who lend to farmers monitor them to make sure that their investment is not diverted. Similarly, modern production contracts offered by supermarkets or agro-export firms entail a loan component under the form of input advances and, like traditional moneylenders, supermarkets also want to make sure that this investment is not diverted. However, unlike moneylenders, supermarkets do care about the attributes of the product (form, quality, food safety, etc.). Whether such attributes are present in the harvested product is largely influenced by the advice and the extension services received by the farmer. We built a financial contracting model where we show that supermarkets, choosing to forgo specialization, optimally delegate to a multi-tasking agent both the monitoring and the advisory missions. This contract is shown to potentially enhance credit access for small farmers and sometimes to involve excessive monitoring. Finally, when involved in production, small farmers are shown to benefit the most, even though the supermarket has all bargaining power when making the contract offer.