Group contracts and sustainability: Experimental evidence from smallholder seed production

Abstract

Contract farming in seed production has played an instrumental role in bringing private investment into seed research and production. As developing countries have predominantly small and marginal farmers, the number of inefficiencies that arise from seed contractual agreements hinders producers from realizing the full potential benefits from seed contracts. We carried out an economic experiment with real producers and organizers currently engaged in seed production to analyze their preference for group seed contracts, its sustainability and welfare implications in the seed value chain. The producers are offered two types of group contracts: B and C. Contract B involves a company-organizer-seed producer group (SPG) whereas contract C removes the organizer and directly engages with the SPG (company → SPG). In the experiment, producers are asked to choose between an existing contract and either of the proposed group contracts. The experiment consists of two treatments: (i) concealed and revealed price information between agents, and (ii) presence and absence of a local organizer while making the decision. We find that the preference for group contract B is higher than for group contract C, suggesting the need for producers bargaining which can be achieved through group contract in the existing contract, Bargaining is high (6.3 percentage points) when price information is concealed. SPGs survive for about four out of five rounds and more than half of the groups (53%) formed in the first round survived throughout the five rounds, indicating a very high group sustainability.

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“…Several studies have discussed the negative impacts of CF (Simmons, 2005). Information asymmetry and the imbalance of bargaining power between contractual parties are critical issues in the CF literature (Veettil et al, 2021). Further, the lack of a proper legal and compliance framework to support new institutional mechanisms in many developing countries leave smallholders exposed to risks (Barrett, 2012).…”

“…Further, the lack of a proper legal and compliance framework to support new institutional mechanisms in many developing countries leave smallholders exposed to risks (Barrett, 2012). In the absence of a strong legal framework, companies and other agents in the seed production chain could falsify contracts by raising quality standards to control volume, alter the agreed prices, or even resort to cheating (Veettil et al, 2021). Manipulations may occur at various levels and firms tend to favor large farmers, delay payments, not provide compensation for natural calamity loss, and conceal the pricing method (Grosh, 1994).…”

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“…Due to their private nature, contractual language generally becomes available to the public only upon instigation of litigation and the attendant discussion by the court regarding the contractual rights and obligations that are otherwise shrouded by confidentiality clauses . Current studies assessing seed-sharing contracts thus far indirectly asked questions about contractual arrangements via a survey and have drafted contract designs to utilize rather than relying on collection and review of existing contracts in use (Veettil et al, 2021). To assess what contractual and intellectual property restrictions may stifle organic seed development, we utilized the following methodology.…”

Intellectual property exhaustion, breeder frustration, and hindered innovation: Reviewing U.S. organic corn seed development

“…Due to their private nature, contractual language generally becomes available to the public only upon instigation of litigation and the attendant discussion by the court regarding the contractual rights and obligations that are otherwise shrouded by confidentiality clauses (Lee et al, 2021). Current studies assessing seed-sharing contracts thus far indirectly asked questions about contractual arrangements via a survey and have drafted contract designs to utilize rather than relying on collection and review of existing contracts in use (Veettil et al, 2021). To assess what contractual and intellectual property restrictions may stifle organic seed development, we utilized the following methodology.…”