Contracting, Competition, and Rent Distribution Theory and Empirical Evidence from Developing and Transition Countries

Commodity value chains have undergone tremendous changes in the past decades.Private traders, retailers and food processing companies increasingly contract withfarms and rural households to whom they provide inputs and services in return forguaranteed and quality supplies.However, due to a variety of market imperfections and poor public institutions,farmers in developing and transition countries face major constraints in realizinghigh-quality, consistent supplies. These include financial constraints as well asdifficulties in input markets, lack of technical and managerial capacity etc, especiallyfor high-standards products. To secure their supplies, traders and processors engage incontracting to overcome farmers’ constraints. Emerging empirical evidence suggeststhat these new forms of private vertical coordination can be an engine of economicgrowth, rural development and poverty reduction. However, at the same time there isa concern that the nature of these contracts may act as an important barrier to entry forother agents and may give the dominant partner in a transaction some additionalleverage.Competition could potentially play an important role in reducing inefficiencies andenhancing the bargaining power of local suppliers and thereby improving contractterms, in particular where contract conditions are imposed by monopolisticorganizations. However, at the same time competition may undermine contractenforcement in these vertical coordination systems, as opportunistic behavior mayemerge or as reputation costs of contract breach are lower.The objective of this paper is to analyze the effects of competition on contracting inhigh-value supply chains in an environment of widespread factor marketimperfections and weak contract enforcement. We present a conceptual model andpresent evidence from various case-studies.