Contracting with Smallholders under Joint Liability
No 93128, Discussion Papers from Hebrew University of Jerusalem, Department of Agricultural Economics and Management
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.
Keywords: Agricultural Finance; Consumer/Household Economics; Farm Management; Financial Economics; Public Economics; Research Methods/ Statistical Methods (search for similar items in EconPapers)
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