Article

A Financial Contracting Approach to the Role of Supermarkets in Farmers' Credit Access

American Journal of Agricultural Economics (Impact Factor: 1.36). 02/2008; 92(4). DOI: 10.2139/ssrn.1102579
Source: RePEc

ABSTRACT Traditional moneylenders monitor farmers to ensure that their investment is not diverted. Modern farming contracts offered by supermarkets in developing countries often entail a loan component, and monitoring arises as well. However, unlike moneylenders, supermarkets do care about the attributes of the product. Whether such attributes are obtained is influenced largely by the advice and the extension services received by farmers. We build a financial contracting model where we show that supermarkets optimally undertake both the monitoring and the advisory missions. This contract is shown to potentially enhance credit access for small farmers but sometimes also involves excessive monitoring.

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The second chapter of this dissertation illustrates that standards may therefore have different positive or negative welfare impacts on different actors in the market. Additionally, standards may increase or decrease social welfare. These potentially different impacts on various groups in society have caused suspicion that standards may be captured by lobby groups to serve their individual interests instead of the public. Despite standards potential benefits, fears have arisen (a) that these public regulations may be used as strategic trade-protectionist tools to shelter domestic producers; (b) that private standards may be introduced by retailers as devices to extract rents from other agents in the supply chain; and (c) that certain (groups of) producers in developing countries may be excluded from these production systems governed by high standards and high quality. Each chapter in this dissertation addresses one of these concerns. To analyze the first concern that standards may serve as protectionist instruments, the third chapter develops a political economy model of public standards in which both consumers and producers try to influence the governments standard-setting behavior through lobbying. The model shows that public standards nearly always affect imports and can be either catalysts or barriers to trade, even if standards are optimal from a social welfare perspective. Hence a public standards impact on trade cannot be directly linked to protectionism since the change in imports may be optimal from a (domestic) social welfare perspective. Additionally, even if public standards deviate from the social optimum, this does not necessarily amount to producer protectionism as producers may be hurt by suboptimal public standards as well. 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The most productive producers switch first to the HQE, and in countries with a more heterogeneous production structure this process is more likely to lead to an initial exclusion of producers, although the emergence of the HQE occurs faster in terms of rising incomes. In countries with a more uniform production structure, the emergence of the HQE, although delayed, can be expected to be more inclusive. We also demonstrate that, depending on their nature, transaction costs may or may not reinforce the disadvantaged position of less productive producers. Additionally, our model shows that contracting between producers and processors i.e. processors supplying credit to producers may induce the HQE to be more inclusive towards less efficient producers. The model thus lays out three different mechanisms by which a HQE can be made more inclusive towards different groups of producers, namely (a) by reducing heterogeneity in the initial production structure through raising productivity of the least productive producers; (b) by reducing transaction costs in general and especially those transaction costs that reinforce productivity disadvantages; and (c) by creating an institutional environment that is favorable to contracting between producers and processors or that facilitates producers access to credit.

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