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

Author

Listed:
  • Saenger, Christoph
  • Qaim, Matin
  • Torero, Maximo
  • Viceisza, Angelino
Abstract
In emerging markets for high-value food products in developing countries, processing companies search for efficient ways to source raw material of consistent quality. One widely embraced approach is contract farming. But relatively little is known about the appropriate design of contracts, especially 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.

Suggested Citation

  • Saenger, Christoph & Qaim, Matin & Torero, Maximo & Viceisza, Angelino, 2012. "Contract farming and smallholder incentives to produce high quality: experimental evidence from the Vietnamese dairy sector," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 126430, International Association of Agricultural Economists.
    • Handle: RePEc:ags:iaae12:126430
    DOI: 10.22004/ag.econ.126430
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    References listed on IDEAS

    as
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    3. Marc F. Bellemare, 2010. "Agricultural extension and imperfect supervision in contract farming: evidence from Madagascar," Agricultural Economics, International Association of Agricultural Economists, vol. 41(6), pages 507-517, November.
    4. Bull, Clive & Schotter, Andrew & Weigelt, Keith, 1987. "Tournaments and Piece Rates: An Experimental Study," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 1-33, February.
    5. Alexander, Corinne & Goodhue, Rachael E. & Rausser, Gordon C., 2007. "Do Incentives for Quality Matter?," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 39(1), pages 1-15, April.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Agribusiness; Institutional and Behavioral Economics; International Development; Risk and Uncertainty;
    All these keywords.

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets

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