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The Role of Market Power in Agricultural Contracts

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  • Cordero Salas, Paula

Abstract

I study the economic consequences of shifting bargaining power in relational contracts through interventions such as the formation of a Bargaining Group (BG) for the side of sellers in a market where buyers traditionally hold significant market power. Existing theories of relational contracts predict that such a power transfer will have no impact on market efficiency. In contexts where enforcement institutions are weak, a standard assumption from existing theories of relational contracts - the existence of an enforceable base payment - may not hold. In this case, I show that a transfer of bargaining power can erode market efficiency in a dynamic relational contracting environment, which contradicts findings from existing models of relational contracting. When buyers hold significant market power, they forgo short-term opportunistic behavior by honoring promised performance bonuses in order to keep sellers engaged in trade over time and to accumulate surplus over many periods. With market power eroded by interventions such as the BG, buyers’ long-run gains to trade shirk. When this is coupled with the absence of an enforceable base payment, short-term opportunistic behavior becomes more appealing and trade is more likely to break down. The results here provide policy-makers insight into the economic consequences of enacting policies attempting to balance market power within a framework of fully informal contract enforcement.

Suggested Citation

  • Cordero Salas, Paula, 2009. "The Role of Market Power in Agricultural Contracts," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49376, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea09:49376
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    File URL: http://purl.umn.edu/49376
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    Keywords

    contracts; incomplete enforcement; bargaining group; distribution; institutions; Agribusiness; Agricultural and Food Policy; Industrial Organization; Institutional and Behavioral Economics; International Development; D86; K12; L14; O12; Q13.;

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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