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Contracting with Smallholders under Joint Liability

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  • Kaminski, Jonathan

Abstract

This paper examines the performance of contract farming when agents are groups of jointly-liable farmers who receive input credit from a monopsonistic agribusiness. Accounting for group mechanisms in credit repayment through joint liability and peer monitoring, we derive the optimal monopsonistic contract under moral hazard on production effort. The principal takes into account price incentives not only on farmers’ effort but also on peer monitoring. Then, we show that the optimal pricing rule is not monotonic with respect to the group’s characteristics. Imperfect information implies a distortion on pricing for low-efficient groups, which is Pareto-improving from a social point. Groups of intermediary size and heterogeneity provide the best effort and peer-monitoring incentives.

Suggested Citation

  • Kaminski, Jonathan, 2009. "Contracting with Smallholders under Joint Liability," Discussion Papers 93128, Hebrew University of Jerusalem, Department of Agricultural Economics and Management.
    • Handle: RePEc:ags:huaedp:93128
    DOI: 10.22004/ag.econ.93128
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    References listed on IDEAS

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    1. Armendariz de Aghion, Beatriz, 1999. "On the design of a credit agreement with peer monitoring," Journal of Development Economics, Elsevier, vol. 60(1), pages 79-104, October.
    2. Winter-Nelson, Alex & Temu, Anna, 2002. "Institutional Adjustment and Transaction Costs: Product and Inputs Markets in the Tanzanian Coffee System," World Development, Elsevier, vol. 30(4), pages 561-574, April.
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