Incentives, Information Systems, and Competition

We investigate how different competitive regimes affect the ability to provide incentives based on noisy information systems. The set-up involves multiple producers and processors in the presence of moral hazard and adverse selection. Reduced competition may facilitate incentive provision by allowing more high-powered incentives. This may rationalize both vertical and horizontal integration as seen in many agricultural markets with uncertain quality grading. On the other hand, if trading terms are settled before the information is observed, a noisy information system may suffice to give proper incentives. This may rationalize the use of long-term conditional price contracts in the trading of many agricultural products.     

The roles of risk preferences,selection, and uncertain returns on land contracts

Using panel data on a statistically representative sample of Iowa farmland parcels from 1997 to 2017, we analyze the factors determining whether land is farmed by the owner or rented out under a cash rent or crop share contract. The landowner's decision to rent or operate the land depends on the distribution of expected net returns to the land, and so estimates of the factors affecting rental terms will be biased if the sample only includes rental contracts and excludes the owner-operator. Land with higher mean and/or lower variance of expected net returns is most likely to be rented out. Participants in the rental market will include the most risk-averse landowners and the least risk-averse tenants, while the least risk-averse landowners operate their own land. Our empirical results suggest that the rising use of cash rent contracts and declining incidence of owner-operation and crop-share rental contracts is consistent with falling coefficient of variation in expected net returns per acre.     

农地规模化流转背景下的农业雇佣生产合约:理论模型及实证分析

在中国农地规模化流转的背景下,农业雇佣生产成为客观事实。本文基于多任务委托—代理思想,通过建立农业雇佣生产合约模型,从合约激励角度推演出三种典型的合约形式,即固定工资+过程监督、计件工资+事后客观评估、固定工资+收益分成+事后主(客)观评估。进一步地,本文借助经验素材证实了上述合约形式的存在及其合理性。研究结果表明:在雇佣采茶情景下,采用固定工资+过程监督合约会导致采茶工、茶农和社会三方出现效率损失和福利损失,计件工资+事后客观评估合约优于固定工资+过程监督合约。     

Information Sharing and Oligopoly in Agricultural Markets: The Role of the Cooperative Bargaining Association

We study incentives for information sharing among agricultural intermediaries in imperfectly competitive markets for farm output. Information sharing always increases expected grower and total surplus, but may reduce expected intermediary profits. Even when expected profits increase with information sharing, intermediary firms face a prisoner's dilemma where it is privately rational to withhold information, given that other firms report truthfully. This equilibrium can be avoided if firms' information reports are verifiable, and if firms commit to an ex ante contract that enforces participation in information sharing. We show how agricultural bargaining legislation can implement such a contract with the bargained farm price representing a sufficient statistic of all information held by intermediary firms.     

The Pursuit of Efficiency and Its Unintended Consequences: Contract Withdrawals in the Environmental Quality Incentives Program

This article analyzes why the USDA's Environmental Quality Incentives Program (EQIP) experiences contract withdrawals. Among approved contracts, 17% withdrew one or more conservation practices. After presenting a model of producers' behavior, a logit model is used to examine the withdrawal phenomenon. Withdrawals are linked to producers having an incentive to include low cost-share payments and practices in the conservation plan that increase the probability of approval, but may not be profitable. These results are discussed in light of the changes to EQIP that have been introduced by the 2002 Farm Act.     

Store loyalty, bargaining power and the private label production issue

One of many explanations offered for the rise of private labels(PLs) is that they increase the bargaining power of the retailer.The prior question of the PL production assignment has not beenanalysed in an economic framework. The retailer can either entrustthe production of his PL to the national brand (NB) manufacturerat a low unit cost, with the disadvantage that both products(NB and PL) are held by the same agent, or he can choose a firmfrom the competitive fringe with a higher unit production cost.In a framework where loyalty (presence of store-switching andbrand-switching consumers) and bargaining strength count, weshow that the retailer will assign his PL production to theNB manufacturer when the latter's bargaining power is low. However,a higher consumer loyalty for the NB can reverse the retailer'sdecision.     

Short‐ and Long‐Run Policy Evaluation: Support for Grassland‐Based Milk Production in Switzerland

Following the abolition of the milk quota in 2008, farmers in Switzerland strongly increased the use of concentrate feed in milk production. Against this background, the Swiss government introduced the voluntary grassland‐based milk and meat (GMF) programme in 2014, which combines economic incentives with feeding restrictions to reduce the reliance on concentrate feed and increase the use of grass feed. We analyse the economic and ecological impacts of the GMF programme at the farm and at the sector level in the short‐ and long‐run. We use a difference‐in‐differences approach (ex‐post) and an agent‐based simulation model SWISSland (ex‐ante) to construct counterfactual states to evaluate the programme's impacts. We find that the GMF programme reduces the use of concentrate feed and increases the use of grass feed in Swiss milk production. Whereas the programme has a positive effect on economic indicators such as the farm income, we find no effect on ecological indicators such as the N surplus. Our analysis suggests that feeding restrictions on concentrate feed are not enough to achieve a reduction in the N surplus. Additional feeding restrictions on grassland are necessary. Furthermore, the GMF programme has a dampening effect on sectoral milk supply, and leads to a higher milk price.     

Ex‐ante Evaluation of Policy Measures: Effects of Reward and Punishment for Fertiliser Reduction in Palm Oil Production

Palm oil production creates negative externalities, e.g. through intensive fertiliser application. Policies to limit externalities need an effective, sustainable and efficient measure We use a business simulation game in a framed field experiment in Indonesia to test ex‐ante different incentives for reducing such negative externalities. This setting allows inclusion of adequate contextual features, required for reasonable ex‐ante evaluation of policy measures. The different designs of the test incentives (either a reward or punishment) varied in their magnitude and probability of occurrence but with constant effects on expected income. Results show that participants react differently to these incentives, indicating that the design can contribute significantly to effectiveness, sustainability or efficiency. A high reward with a low probability was found to be the most effective and sustainable incentive. Moreover, for the most efficient design, a low and certain reward is indicated.     

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

In emerging markets for high‐value food products in developing countries, processing companies search for efficient ways to source raw material of high quality. One widely embraced approach is contract farming. But relatively little is known about the appropriate design of financial incentives 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.     

Auction winning,social dynamics and non-compliance in a payment for ecosystem services scheme in Indonesia

Conservation auctions for payment for ecosystem services (PES) are useful to identify the levels of incentives that will cover the opportunity costs of farmers supplying ecosystem services. Although auctions are increasingly used for allocation in PES schemes, the factors that lead to their successful implementation and eventual environmental outcomes are poorly understood in developing countries. We investigated the socio-economic and institutional contexts that led to smallholders' auction winning and eventual compliance using linear mixed-effects models, and post-auction and post-contract surveys. We employed a case study of a conservation contract preceded by a sealed-bid, multiple round, uniform price auction for watershed services from coffee farmers in Lampung, Indonesia. The auction participants presented low education levels, low asset endowments and small plot sizes. The study obtained evidence that farmers with larger plot areas were more likely to win the contracts, suggesting economies of scale. Most farmers considered the auction a fair self-selection mechanism to allocate contracts where allocation was not influenced by power or social rank. Non-compliance was associated with labor availability constraints, short duration of land ownership and existence of previous conservation applications, suggesting lax of capability to invest in applying conservation agriculture. Final bids were however not good predictors of compliance, among other factors, calling into question the potential of auctions to elicit the actual incentive from the farmers. Ensuring that farmers understand the purposes of auctions for effective contract allocation beyond a mere game and identifying farmers that might encounter difficulties fulfilling the contract could increase the likelihood that such a PES scheme would be successful.     

Living under value chains: The new distributive contract and arguments about unequal bargaining power

In the 1980s and 1990s, during the high-water mark of Washington Consensus development, rural sociologists and geographers critical of contract farming described contract as a legal fiction—one that imagines formally equal and voluntary relations between large firms and small farmers and hence that functions purposefully to obscure unequal social relations. Today, however, development planners, who argue for contract farming as an integral part of value chain agriculture, describe unequal bargaining power as a problem for rural development to solve. Our article analyzes how proponents have domesticated what was once a radical critique of contract farming—a phenomenon that we suggest tells of value chain development more broadly. Via a qualitative case study of India, we describe how a range of actors—development planners, state officials, and farmers—now all make arguments about unequal bargaining power and yet hold disparate understandings of what bargaining inequalities mean and what reforms should therefore follow. More specifically, we show how and why common reform proposals—for contract regulation and farmer aggregation—remain constrained by the inequalities they would challenge and thus why farmers themselves speak different possibilities to the problem of unequal bargaining power.     

Compliance Monitoring and Agri-Environmental Policy

This paper examines the issue of compliance monitoring in agri-environmental policy when a farmer is risk-neutral and risk-averse. The optimal contract model presented here significantly extends and generalises the results and conclusions of Choe and Fraser (1998). In this paper the environmental agency explicitly chooses monitoring accuracy and monitoring costs as well as rewards for farmers. It is found that, by modelling the environmental agency as being cost-conscious optimal monitoring accuracy may or may not be higher for a risk-averse farmer than for a risk-neutral farmer. Essentially, the environmental agency faces an explicit trade-off between monitoring costs and incentive payments as a means to ensure the desired behaviour from the farmer. The importance of the results derived are discussed in the context of agri-environmental policy design and implementation     

Contracting and Farmers’ Perception of Unfair Trading Practices in the EU Dairy Sector

It is commonly asserted that unfair trading practices (UTPs) emerge largely as a result of contract incompleteness. In line with this view it is claimed that making contracts more complete will represent an antidote to UTPs. In this paper we argue that this does not need to be the case. This is because contracts, except for their potential to increase the surplus generated in the transaction, determine how this surplus will be divided. This, in turn, makes it possible for both trading partners to use contractual terms to turn the distributional conflict to their advantage. In the presence of unequal distribution of bargaining power this may lead to a situation in which the stronger party may succeed in tilting the contract in its favour by including UTPs in the contract content. Drawing insights from data collected in 2017 through a field survey among dairy farmers in France, Germany, Poland and Spain, we find support for this argument. Our estimation results show that contract completeness increases the likelihood of farmers reporting that their contracts with processors include the practices that may be considered as UTPs. Further, and also in line with this argument, contract completeness does not seem to affect UTPs during the contract execution or its termination.     

The Swiss payment for milk processed into cheese: ex post and ex ante analysis

We make use of both an ex post and an ex ante evaluation to analyze the Swiss payment for milk processed into cheese. This payment for each kilogram of raw milk processed into cheese is issued to milk producers through dairy processors. In the ex post evaluation, by applying a vector autoregressive model, we estimate the effects of reductions of the payment for prices of raw milk used to produce Emmentaler, Gruyère, and industrial cheese. Past declines in the payment have only been partially transmitted to raw milk prices. The rate of transmission is higher for milk used for the production of industrial cheese than for artisan cheeses. In the ex ante impact evaluation, we use a partial equilibrium model and develop a counterfactual scenario in which the payment is removed. The payment for milk processed into cheese is found to have effects on cheese production and exports but also has important indirect effects on other dairy products. Our findings suggest that about two‐thirds of the payment are benefiting milk producers. At the same time, the overall welfare losses resulting from the elimination of the aid are smaller than the budget allocated to this measure, suggesting a net welfare gain from elimination.     

Are forest plantation subsidies affecting land use change and off-farm income? A farm-level analysis of Chilean small forest landowners

Forest plantations have increased rapidly in the last three decades, to a large extent due to direct and indirect financial incentives. At the farm level, forestry incentives can affect the investment decisions of small forest landowners and bring socioeconomic externalities or unintended effects associated with farm management. The purpose of this study is to assess the ex post impacts of a forestry subsidy on land use changes and off-farm income experienced by Chilean small forest landowners. A structural equation mediation model (SEM) was estimated using a time frame of 15 years (1998–2013). To reduce the selection bias, propensity score matching (PSM) was performed prior to the estimation of the SEM. Results indicate that the subsidy had a significant effect on land use changes, as it increases forest plantations and replaces pastures primarily, but also crops and native forest to a lesser extent. In addition, beneficiaries of the subsidy had a marginal increase in off-farm income not explained by the increase in forest plantation.     

Feeder-pig Producers and Finishers: Who Should Contract?

The purpose of this study is to determine the minimum level of contract payments required to produce hogs under a production contract. Required payments needed for contract growing to be preferred to independent production for the average-profit, slightly risk-averse, feeder-pig producer and for the high-profit, moderately to strongly risk-averse, feeder-pig producer are found to be similar to those currently offered by contractors. Feeder-pig finishers with average profit levels would either have to be strongly risk-averse or expect economic profits to fall to zero to prefer contracting over independent production. Low-profit feeder-pig finishers who are moderately to strongly risk-averse would prefer contracting. Feeder-pig finishers who historically have experienced above-average profits would require payments substantially above current contract rates to prefer contracting.     

Distress rentals and the land rental market as a safety net: contract choice evidence from Tigray,Ethiopia

Rural households in the semiarid Northern Ethiopian highlands are net buyers of food. Crop failure due to erratic and unpredictable rainfall occurs frequently and leads to food shortages and income shocks. The renting out of land may be one of the coping responses of households exposed to shocks. We developed a theoretical household model for poor landlord households capturing their contract choice response to downside production shocks. We tested econometrically whether contract choice may depend on poverty, capital constraints, production risk and random shocks. The multinomial logit model estimates show that poor households experiencing random shocks are more likely to choose fixed‐rent contracts as a distress response to shocks, suggesting that fixed‐rent contracts may be used to meet immediate needs, but at the expense of future incomes. We also found that fixed‐rent contracts are preferred when ex ante production risk is low, while sharecropping is more likely where production risk is high. Finally, we found an indication that the choice of a fixed‐rent contract as a coping response to shocks comes as a last resort after all other means of coping are exhausted.     

Which smallholders are willing to adopt Acacia mangium under long-term contracts? Evidence from a choice experiment study in Indonesia

Smallholder ownership of forests has grown rapidly over the last 25 years, leading to global forest transition; however, incentives are required to keep smallholders growing trees under long-term afforestation contracts. This article reports on smallholders’ willingness to join afforestation programs, growing Acacia mangium under contract on their private farmland. In a Choice Experiment, we examine the effects of policy attributes of afforestation contracts, including contract duration, labour participation, timber insurance, training opportunities, road improvement, and expected income. We report the marginal value of changes in monetary terms. A scale-extended latent class model was used to analyse preference heterogeneity in data of 323 smallholders from three different regions in Indonesia (West Kalimantan, Yogyakarta, and South Sumatera). These regions are at different forest transition stages. Our results indicate that there are four latent preference classes, which value attributes of the contract differently. Individual characteristics (risk orientation, tree growing experiences, and occupation), and regional differences explain the probability of preference class membership. Our findings have important implications for enhancing afforestation strategies that improve social welfare of smallholders in various forest transition stages.     

Option Contracts as a Solution to the Holdup Problem in Agri-food Markets

It is well known that incomplete contracts, together with asset specific investment, can result in investment holdup because of opportunistic behavior by either the commodity producer or the processor. In recent years, several papers have shown how contracts which explicitly account for ex post renegotiation can reduce or eliminate the holdup problem. In one particularly promising type of analysis, a simple option contract is awarded to the upstream producer. In this paper, it is shown that if the source of risk is with respect to the value of the processed commodity, then a producer option contract does not work but a processor option contract does work to eliminate the holdup problem. A simple example is used to illustrate the main findings.     

The Competitive Implications of Top-of-the-Market and Related Contract-Pricing Clauses

This article examines the competitive implications of contract pricing arrangements, which link the contract price to the subsequent cash price. We focus on so-called "top-of-the-market pricing" (TOMP) in cattle procurement. The TOMP clause is shown to have anticompetitive consequences when the same buyers who purchase contract cattle with the TOMP clause also compete to procure cattle in the subsequent spot market. The TOMP clause reduces packers' incentives to compete aggressively in the spot market. Although TOMP pricing is not in producers' collective interest, rational sellers may nonetheless sign these contracts with little or no financial inducement.