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Incentives and moral hazard: plot level productivity of factory-operated and outgrower-operated sugarcane production in Ethiopia

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  • Mengistu Assefa Wendimu
  • Arne Henningsen
  • Tomasz Gerard Czekaj

Abstract

We investigate the rather unique contractual arrangement between one of the largest sugar factories in Ethiopia and its adjacent outgrower associations. The only significant difference between the sugarcane production on the factory-operated plantation and on the outgrower-operated plots is the remuneration system and thus, the incentives to the workers. We compare the productivity of these two production models based on a new cross-sectional plot-level data set. As sugarcane production depends on various exogenous factors that are measured as categorical variables (e.g. soil type, cane variety, etc.), we estimate the production function by a nonparametric kernel regression method that takes into account both continuous and categorical explanatory variables without assuming a functional form. Our results show that outgrower-operated plots have−ceteris paribus−a significantly higher productivity than factory-operated plots, which can be explained by outgrowers having stronger incentives to put more effort in their work than the employees of the sugar factory.
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  • Mengistu Assefa Wendimu & Arne Henningsen & Tomasz Gerard Czekaj, 2017. "Incentives and moral hazard: plot level productivity of factory-operated and outgrower-operated sugarcane production in Ethiopia," Agricultural Economics, International Association of Agricultural Economists, vol. 48(5), pages 549-560, September.
  • Handle: RePEc:bla:agecon:v:48:y:2017:i:5:p:549-560
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    Cited by:

    1. Wendimu, Mengistu Assefa & Henningsen, Arne & Gibbon, Peter, 2016. "Sugarcane Outgrowers in Ethiopia: “Forced” to Remain Poor?," World Development, Elsevier, vol. 83(C), pages 84-97.
    2. repec:bla:agecon:v:49:y:2018:i:2:p:203-212 is not listed on IDEAS
    3. repec:eee:wdevel:v:112:y:2018:i:c:p:259-271 is not listed on IDEAS

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    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment

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