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

Author

Listed:
  • Christoph Saenger
  • Matin Qaim
  • Maximo Torero
  • Angelino Viceisza

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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Suggested Citation

  • Christoph Saenger & Matin Qaim & Maximo Torero & Angelino Viceisza, 2013. "Contract farming and smallholder incentives to produce high quality: experimental evidence from the Vietnamese dairy sector," Agricultural Economics, International Association of Agricultural Economists, vol. 44(3), pages 297-308, May.
  • Handle: RePEc:bla:agecon:v:44:y:2013:i:3:p:297-308
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    File URL: http://hdl.handle.net/10.1111/agec.2013.44.issue-3
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    References listed on IDEAS

    as
    1. 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).
    2. Eckel, Catherine C. & Grossman, Philip J., 2008. "Men, Women and Risk Aversion: Experimental Evidence," Handbook of Experimental Economics Results, Elsevier.
    3. Marc F. Bellemare, 2010. "Agricultural extension and imperfect supervision in contract farming: evidence from Madagascar," Agricultural Economics, International Association of Agricultural Economists, vol. 41(6), pages 507-517, November.
    4. Alexander, Corinne & Goodhue, Rachael E. & Rausser, Gordon C., 2007. "Do Incentives for Quality Matter?," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 39(01), pages 1-15, April.
    5. 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.
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    More about this item

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • 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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