Enforcement of Formal and Informal Contracts and the Development of the Local Dairy Industry in Algeria

In Algeria, the development of the local milk value-chain goes through the coexistence an emerging formal contracting and the dominant informal contracting. Since the latter encounters frequent enforcement issues that can destabilize the formal contracts. Our article analyzes efficient enforcement mechanisms that can ensure a stable coexistence formal and informal contracting. Having recourse to the neo-institutional approach, we test different hypotheses on the comparative efficiency of the contract enforcement mechanisms using survey data collected in one of the main value chains of local dairy regions in Algeria. Our empirical results mainly show that the formal contract is an efficient mechanism to manage milk quality risks thanks to its contractually defined renegotiation procedure that avoids terminations and litigation in case of problems with compliance to dairy standards. Contrary to the literature, we find that reputation and t- is not an efficient mechanism for enforcing informal contracts without public supervision and control.