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Contracting in Agriculture

Paper Session

Sunday, Jan. 3, 2021 3:45 PM - 5:45 PM (EST)

Hosted By: Agricultural and Applied Economics Association
  • Chair: Clark Lundberg, San Diego State University

Determinants of Relational Contract Performance: Experimental Evidence

Steven Wu
Purdue University


laboratory experiments. Relational contracts are informal agreements that people use to engage in trade
when third-party enforcement of important performance factors is not possible. As such, nearly all
agricultural contractual relationships in both developed and developing countries include relational
elements because the set of performance factors that the traders care about is typically much larger than
the set of performance factors that can be publicly verified by a third-party such as a court or
arbitrator. However, there is currently limited empirical evidence on the determinants of contractual
performance, which includes contractual acceptance, the delivery of promised quantity/quality, and
payment of promised contingent payments. Understanding the factors that drive contractual performance
is particularly important for relational contracts given limited third-party enforcement of
agreements. While theory predicts that the primary drivers of contractual performance are contract
designs that obey individual rationality and self-enforcement constraints, we find that other determinants
such as the level of the guaranteed base price (independent of whether the individual rationality constraint
is satisfied), and a history of prior cooperation can matter nearly as much as the theoretical constraint
conditions. This suggests that agents care a great deal about strategic uncertainty which is not captured
by the standard constraints.

The Effects of Contract Farming on Diets and Nutrition in Ghana

Bethelhem Legesse Debela
University of Goettingen
Anette Ruml
University of Goettingen
Matin Qaim
University of Goettingen


Contract farming is becoming increasingly important in developing countries, to coordinate transactions
along agricultural supply chains. In this paper, we examine the diet and nutrition implication of engaging in
contract farming among smallholder farmers in Ghana. Previous studies have analyzed the effects of
contract farming on farm production and household income. However, little is known about the effects of
contract farming on household and individual nutrition. We know of no study that has analyzed the effects
of contract farming on household and individual dietary diversity as well as anthropometric measures. Our
study further contributes to the existing literature by investigating differences in effects across different
types of contracts, which has largely been neglected. Preliminary results show that producing oil palm with
resource-providing contracts leads to a higher household and individual dietary diversity, and a higher
height-for-age z-score, suggesting positive long-term nutritional benefits for small children aged 2-6 years.
The effects of marketing contracts are less clear, and we find no nutritional effects for small children.

Contracting and Transportation Costs

Clark Lundberg
San Diego State University
Tristan Skolrud
University of Saskatchewan


Agricultural contracts are important tools in risk management for both producers and contractors.
Critically, contracts can eliminate commodity price uncertainty, with output prices and delivery locations
agreed to in advance. However, contracts also introduce a degree of inflexibility in producers’ ability to
respond to changes in input prices. In particular, by committing to delivery locations and output quantities
in advance, producers expose themselves to uncertainty in transportation costs. We develop a simple
model of endogenous contracting where producers face both output price risk and transportation cost risk.
Our model predicts that contracting intensity is a decreasing function of distance-to-market and
transportation costs more generally. These findings have important implications for contracting as a
development tool, particularly as it relates to transportation infrastructure in developing countries. We
empirically investigate the relationship using ERS ARMS data, including the spatial distribution of
contracting uptake, as well as causal estimates of transportation costs on contracting. Our identification
strategy leverages local- and state-level variation in gas prices. We provide plausible causal estimates on
the impact of transportation costs on contract uptake using exogenous changes in both gas taxes and
ethanol subsidies.
JEL Classifications
  • A1 - General Economics