As You Sow, So Shall You Reap: The Welfare Impacts of Contract Farming

What is the impact of participation in commodity chains on producer welfare? Contract farming – wherein a processing firm delegates its production of agricultural commodities to growers – is often viewed as a means of increasing grower welfare in developing countries. Because the nonrandom participation of growers in contract farming has so far not been dealt with convincingly, whether participation in contract farming increases welfare is up for debate. This paper uses the results of a contingent valuation experiment to estimate willingness to pay to enter contract farming, which is then used to control for actual participation in contract farming. Using data from Madagascar, results indicate that contract farming entails a 12- to 18-percent increase in income; a 16-percent decrease in income volatility; a two-month decrease in the duration of the hungry season; and a 30-percent increase in the likelihood that a household receives a formal loan.