Reputation effect of the moral hazard on contract farming market development: Game theory application on rice farmers in Benin

Abstract

A good reputation is the basis for rice farmers to survive and gain trust from buyers in a competitive business environment. However, due to the existence of information asymmetry between buyers and rice farmers, the moral hazard problem is the key obstacle that impedes the benefits of related shareholders and hinders the efficiency of contract farming negotiations. It is crucial to design a control mechanism to avoid the negative impact of the moral hazard. This paper studies the principal and agent relationship between rice farmers and buyer in contract farming negotiation. Because of the influence of information asymmetry, many buyers have suffered from being cheated by rice farmers who fail to comply with the terms of the contract or provide fraudulent products in practice. These frequent cases will function to deteriorate any long-term relationships between rice farmers and buyers. The study focuses on the analysis of the causes of moral risks and the effect of reputation on moral risk utilizing repeated game theory. The purpose of this paper is to help both rice farmers and buyers effectively avoid moral hazards and achieve a win-win situation in contract farming negotiation. The result show that the rice farmer in contract farming practices has the incentive to maintain his reputation in order to gain more profits in the future. That also accounts for the reasons why the rice farmer will invest more to improve the customer's service level, caring about the quality of product and the comments of finished contractor customer, to keep a longer farmer-buyer relationship. The rice farmer in contract farming practices has the incentive to maintain his reputation in order to gain more profits in the future and this means that contract farming can be developed with great success in Benin.

Contract Farming towards Social Business: A New Paradigm

“…The majority of the literature has discussed the legalities of the contract such as fundamentals of contracts, issues in contracts and litigation matters, contract enforcement, types of contracts, relational norms and relational aspects in contract farming [38,39,49,50].…”

“…There is a need to apply relational norms in formal contracts to increase the trust in parties under contract. The concerns raised by researchers over informal contracts are supported by the available studies, especially those conducted in developing countries [28][29][30][31][32][33][34][35][36][37][38][39][40].…”

“…Therefore, this study proposes a shift in the paradigm of contract farming to a more innovative and sustainable solution in order to mitigate the crisis in contract farming and to enhance the social and environmental agenda of contract farming. Sustainable innovation changes the philosophy, values, operations, and practices of the conventional business to achieve a specific purpose or realise social or environmental value beyond economic returns [28][29][30][31][32][33][34][35][36][37][38][39][40]. Thus, this study proposes a social business contract farming model as an innovative and sustainable solution to transform conventional contract farming.…”

Linking Farmers’ Bargaining Power in Trade to their Plans for Future Economic Activities

“…This is also a contributing factor in market power between farmers and buyers. Moral hazard refers to farmers' egoistic behaviour after reaching an agreement with purchasers (Olounlade et al 2019). It occurs when insured farmers are less concerned about the possibility of a loss as a result of their insurance coverage, thus tending less to their crops (He et al 2019).…”

“…Because of the existence of information asymmetry between buyers and rice farmers, the moral hazard problem is the primary impediment to the growth of the contract farming market (Olounlade et al 2019).…”