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Abstract
Commodity value chains have undergone tremendous changes in the past decades.
Private traders, retailers and food processing companies increasingly contract with
farms and rural households to whom they provide inputs and services in return for
guaranteed and quality supplies.
However, due to a variety of market imperfections and poor public institutions,
farmers in developing and transition countries face major constraints in realizing
high-quality, consistent supplies. These include financial constraints as well as
difficulties in input markets, lack of technical and managerial capacity etc, especially
for high-standards products. To secure their supplies, traders and processors engage in
contracting to overcome farmers' constraints. Emerging empirical evidence suggests
that these new forms of private vertical coordination can be an engine of economic
growth, rural development and poverty reduction. However, at the same time there is
a concern that the nature of these contracts may act as an important barrier to entry for
other agents and may give the dominant partner in a transaction some additional
leverage.
Competition could potentially play an important role in reducing inefficiencies and
enhancing the bargaining power of local suppliers and thereby improving contract
terms, in particular where contract conditions are imposed by monopolistic
organizations. However, at the same time competition may undermine contract
enforcement in these vertical coordination systems, as opportunistic behavior may
emerge or as reputation costs of contract breach are lower.
The objective of this paper is to analyze the effects of competition on contracting in
high-value supply chains in an environment of widespread factor market
imperfections and weak contract enforcement. We present a conceptual model and
present evidence from various case-studies.