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Contract farming and smallholder incentives to produce high quality: experimental evidence from the Vietnamese dairy sector

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  • Saenger, Christoph
  • Qaim, Matin
  • Torero, Maximo
  • Viceisza, Angelino

Abstract

In emerging markets for high-value food products in developing countries, processing companies search for efficient ways to source raw material of consistent quality. One widely embraced approach is contract farming. But relatively little is known about the appropriate design of contracts, especially in a small farm context. We use the example of the Vietnamese dairy sector to analyze the effectiveness of existing contracts between a processor and smallholder farmers in terms of incentivizing the production of high quality milk. A framed field experiment is conducted to evaluate the impact of two incentive instruments, a price penalty for low quality and a bonus for consistent high quality milk, on farmers’ investment in quality-improving inputs. Statistical analysis suggests that the penalty drives farmers into higher input use, resulting in better output quality. The bonus payment generates even higher quality milk. We also find that input choice levels depend on farmers’ socio- economic characteristics such as wealth, while individual risk preferences seem to be less important. Implications for the design of contracts with smallholders are discussed.

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Bibliographic Info

Paper provided by Georg-August-Universitaet Goettingen, GlobalFood, Department of Agricultural Economics and Rural Development in its series Discussion Papers with number 122614.

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Date of creation: Apr 2012
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Handle: RePEc:ags:gagfdp:122614

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Keywords: Agribusiness; Community/rural/urban development; Institutional and behavioral economics; Demand and price analysis; Agribusiness; Community/Rural/Urban Development; Demand and Price Analysis; Institutional and Behavioral Economics; C93; D22; L14; O13; Q12; Q13;

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  1. Johan F.M. Swinnen & Anneleen Vandeplas, 2010. "Market power and rents in global supply chains," Agricultural Economics, International Association of Agricultural Economists, vol. 41(s1), pages 109-120, November.
  2. Eckel, Catherine C. & Grossman, Philip J., 2008. "Men, Women and Risk Aversion: Experimental Evidence," Handbook of Experimental Economics Results, Elsevier.
  3. Alexander, Corinne E. & Goodhue, Rachael E. & Rausser, Gordon C., 2007. "Do Incentives For Quality Matter?," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 39(01), April.
  4. Bellemare, Marc F., 2010. "Agricultural Extension and Imperfect Supervision in Contract Farming: Evidence from Madagascar," MPRA Paper 23788, University Library of Munich, Germany.
  5. Birthal, Pratap S. & Joshi, P. K. & Gulati, Ashok, 2005. "Vertical coordination in high-value commodities," MTID discussion papers 85, International Food Policy Research Institute (IFPRI).
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Cited by:
  1. Mahdi, Shireen, 2012. "Quality contingent contracts : evidence from Tanzania's coffee market," Policy Research Working Paper Series 6171, The World Bank.

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