Risk and Transactions Cost in Contracting: Results from a Choice-Based Experiment

Abstract

Contracting is a contentious issue in agriculture. Competing theories assert that risk or transactions cost drive contracting decisions, with some argument that autonomy also plays a role. We examine preferences for different contract attributes using a choice-based conjoint experiment. Results of a study of agricultural producers show that both risk and transactions cost play a role in contracting decisions. Autonomy also plays a role, especially to the extent that producers wish to avoid total loss of autonomy. These results suggest that the effects of risk and transactions cost are relative and should both be considered when analyzing contracting decisions.

Using Choice Experiments to Investigate the Policy Relevance of Heterogeneity in Farmer Agri-Environmental Contract Preferences

“…Wilson 1997;Horne 2006;Ruto and Garrod 2009;Espinosa-Goded et al 2010). Previous studies have selected attributes which policy-makers can alter (Ruto and Garrod 2009), may explain participation and non-participation (Wilson and Hart 2000), are inspired by existing agri-environmental contracts (Vanslembrouck et al 2002;Horne 2006;Espinosa-Goded et al 2010), are theoretically inspired (Hudson and Lusk 2004) or based on previous findings (Wilson 1997). These criteria should not be neglected.…”

“…Although heterogeneity in contract preferences among farmers has been identified in several studies (Wilson and Hart 2000;Vanslembrouck et al 2002;Hudson and Lusk 2004;Hackl et al 2007;Ruto and Garrod 2009) farmers continue to be offered the same contract design in existing programmes. Hudson and Lusk (2004, 14) conclude that "…this heterogeneity could have profound impact on the efficacy of contract and public policy design."…”

“…Although widely used for valuation, few studies have applied a CE to investigate landowners' contract preferences (e.g. Hudson and Lusk 2004;Horne 2006;Ruto and Garrod 2009;Espinosa-Goded et al 2010). Afforestation contracts are selected as a case and example of a specific group of agri-environmental contracts, which in a Danish context have not succeeded in achieving the political goal, i.e.…”

Asset-building payments for ecosystem services: assessing landowner perceptions of reforestation incentives in Lebanon

“…This may be due to landowner perceptions of risk and uncertainty in general, particularly for those with incomes tied to farming and forestry (Blennow et al, 2014;Menapace et al, 2013), as well as risks specifically attributed to results-oriented schemes (Burton & Schwarz, 2013). For example, monitoring could be viewed as both an annoyance and loss of autonomy (Hudson & Lusk, 2004). Lack of trust was a key issue raised in the study by a handful of study participants and qualitative probing revealed some interesting responses by landowners with regards to trust in the schemes, as well as with PES in general.…”

“…For PES buyers, contract designs often involve trade-offs between supplier uptake, transaction costs, and expected outcomes (Engel et al, 2008). Contracts that are highly bureaucratic or involve excessive conditionality are perceived as being too onerous or risky, reducing landowner uptake (Hudson & Lusk, 2004). In contrast, lack of conditionality or monitoring could result in noncompliance (e.g.…”