Contracting with Smallholders under Joint Liability

• Main Author: Kaminski, Jonathan
• Format: Publication
• Language: English
• Published: 2009
• Subjects: Agricultural Finance; Consumer/Household Economics; contract farming; D82; Farm Management; Financial Economics; joint liability; L14; moral hazard; peer monitoring; Public Economics; Q13; Research Methods; Statistical Methods

This paper examines the performance of contract farming when agents are groupsof jointly-liable farmers who receive input credit from a monopsonistic agribusiness.Accounting for group mechanisms in credit repayment through joint liability andpeer monitoring, we derive the optimal monopsonistic contract under moral hazardon production effort. The principal takes into account price incentives not onlyon farmers’ effort but also on peer monitoring. Then, we show that the optimalpricing rule is not monotonic with respect to the group’s characteristics. Imperfectinformation implies a distortion on pricing for low-efficient groups, which isPareto-improving from a social point. Groups of intermediary size and heterogeneityprovide the best effort and peer-monitoring incentives. Replaced with revised version of paper Jan. 11, 2012