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Contracting, Competition, and Rent Distribution Theory and Empirical Evidence from Developing and Transition Countries

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  • Swinnen, Johan F.M.
  • Vandeplas, Anneleen

Abstract

Commodity value chains have undergone tremendous changes in the past decades. Private traders, retailers and food processing companies increasingly contract with farms and rural households to whom they provide inputs and services in return for guaranteed and quality supplies. However, due to a variety of market imperfections and poor public institutions, farmers in developing and transition countries face major constraints in realizing high-quality, consistent supplies. These include financial constraints as well as difficulties in input markets, lack of technical and managerial capacity etc, especially for high-standards products. To secure their supplies, traders and processors engage in contracting to overcome farmers' constraints. Emerging empirical evidence suggests that these new forms of private vertical coordination can be an engine of economic growth, rural development and poverty reduction. However, at the same time there is a concern that the nature of these contracts may act as an important barrier to entry for other agents and may give the dominant partner in a transaction some additional leverage. Competition could potentially play an important role in reducing inefficiencies and enhancing the bargaining power of local suppliers and thereby improving contract terms, in particular where contract conditions are imposed by monopolistic organizations. However, at the same time competition may undermine contract enforcement in these vertical coordination systems, as opportunistic behavior may emerge or as reputation costs of contract breach are lower. The objective of this paper is to analyze the effects of competition on contracting in high-value supply chains in an environment of widespread factor market imperfections and weak contract enforcement. We present a conceptual model and present evidence from various case-studies.

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Bibliographic Info

Paper provided by European Association of Agricultural Economists in its series 103rd Seminar, April 23-25, 2007, Barcelona, Spain with number 9413.

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Date of creation: 2007
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Handle: RePEc:ags:eaa103:9413

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Keywords: Farm Management;

References

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  1. Jayne, T.S. & Yamano, Takashi & Nyoro, James, 2004. "Interlinked credit and farm intensification: evidence from Kenya," Agricultural Economics, Blackwell, vol. 31(2-3), pages 209-218, December.
  2. Genicot, Garance & Ray, Debraj, 2006. "Bargaining power and enforcement in credit markets," Journal of Development Economics, Elsevier, vol. 79(2), pages 398-412, April.
  3. Bell, Clive, 1988. "Credit markets and interlinked transactions," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 1, chapter 16, pages 763-830 Elsevier.
  4. Gow, Hamish R. & Streeter, Deborah H. & Swinnen, Johan F. M., 2000. "How private contract enforcement mechanisms can succeed where public institutions fail: the case of Juhocukor a.s," Agricultural Economics, Blackwell, vol. 23(3), pages 253-265, September.
  5. Raymond Fisman & Mayank Raturi, 2004. "Does Competition Encourage Credit Provision? Evidence from African Trade Credit Relationships," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 345-352, February.
  6. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," World Bank Economic Review, World Bank Group, vol. 4(3), pages 351-66, September.
  7. Hoff, Karla & Stiglitz, Joseph E., 1997. "Moneylenders and bankers: price-increasing subsidies in a monopolistically competitive market," Journal of Development Economics, Elsevier, vol. 52(2), pages 429-462, April.
  8. Boughton, Duncan & Tschirley, David L. & Zulu, Ballard & Ofico, Afonso Osorio & de Marrule, Higino Francisco, 2003. "Cotton Sector Policies And Performance In Sub-Saharan Africa:Lessons Behind The Numbers In Mozambique And Zambia," 2003 Annual Meeting, August 16-22, 2003, Durban, South Africa 25855, International Association of Agricultural Economists.
  9. Jean-Marie Codron & Zouhair Bouhsina & Fatiha Fort & Emilie Coudel & Aurélie Puech, 2004. "Supermarkets in Low-income Mediterranean Countries: Impacts on Horticulture Systems," Development Policy Review, Overseas Development Institute, vol. 22, pages 587-602, 09.
  10. Jonathan Conning, 2001. "Of Pirates and Moneylenders: Product Market Competition and the Depth of Lending relationships in a rural market in Chile," Department of Economics Working Papers 2000-08, Department of Economics, Williams College.
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Cited by:
  1. Fontaine, Damien & Gaspart, Frederic & Frahan, Bruno Henry de, 2008. "Modelling the impact of private quality standards on the fresh fruit and vegetable supply chains in developing countries," 2008 International Congress, August 26-29, 2008, Ghent, Belgium 44378, European Association of Agricultural Economists.

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