Category: Uncategorized

Since I had a post discussing contract farming and agricultural value chains yesterday, I thought I should also mention this new article (gated; click here for an older, ungated version) by Rocco Macchiavello and Ameet Morjaria published in the latest issue of the American Economic Review, titled “The Value of Relationships: Evidence from a Supply Shock to Kenyan Rose Exports.”

Here is the abstract:

This paper provides evidence on the importance of reputation in the context of the Kenyan rose export sector. A model of reputation and relational contracting is developed and tested. A seller’s reputation is defined by buyer’s beliefs about seller’s reliability. We show that (i) due to lack of enforcement, the volume of trade is constrained by the value of the relationship; (ii) the value of the relationship increases with the age of the relationship; and (iii) during an exogenous negative supply shock deliveries are an inverted-U shaped function of relationship’s age. Models exclusively focusing on enforcement or insurance considerations cannot account for the evidence.

Back in March, I was asked by Clemson University’s Michael Vassalos to contribute to a special issue of Choices, the Agricultural and Applied Economics’ outreach magazine, on the theme of agricultural contracts.

After some discussion, it was determined that I would write on the welfare impacts of participation in contract farming for smallholder farmers in developing countries. The special issue also includes nice articles on current trends in agricultural contracts, the economics of agricultural contract grower protection legislation, and risk and the use of contracts by vegetable growers.

My article, titled “Contract Farming: What’s In It for Smallholder Farmers in Developing Countries?,” was published last Friday in Choices. After discussing the theoretical pros and cons of participating in contract farming for smallholder farmers in developing countries and whether the institution does make them better off, I offer some skeptical thoughts about the policy relevance of the empirical findings (including my own) on the welfare impacts of contract farming:

Suppose you want to study the demand for a given good. If you want your work to be grounded in theory, you probably want to start with primitives. That is, you will want to start with (i) consumer preferences, as represented by a utility function U(.) defined over the consumption x of the good, (ii) the price p of the good whose demand you want to study (for ease of notation, I am ignoring the prices of other goods, whether they are substitutes or complements), and (ii) consumer income w.

With that information, you can then maximize the consumer’s utility U(x) by choosing x such that px = w (the constraint will hold with equality if you assume that the consumer’s preferences are monotonic, i.e., consumers derive greater well-being for greater amounts of x). This yields x(p,w), the consumer’s Marshallian demand (some prefer to call it a Walrasian demand) for the good whose demand you are studying when price is equal to p and income is equal to w. From x(p,w), you can calculate how consumer demand changes as price increases or as income increases, which you would respectively denote dx/dp and dx/dw. (Yes, I am abusing notation by using d to denote partial derivatives; bear with me.)