Contracting with Smallholders under Joint Liability
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This paper examines the performance of contract farming when agents are groups
of jointly-liable farmers who receive input credit from a monopsonistic agribusiness.
Accounting for group mechanisms in credit repayment through joint liability and
peer monitoring, we derive the optimal monopsonistic contract under moral hazard
on production effort. The principal takes into account price incentives not only
on farmers’ effort but also on peer monitoring. Then, we show that the optimal
pricing rule is not monotonic with respect to the group’s characteristics. Imperfect
information implies a distortion on pricing for low-efficient groups, which is
Pareto-improving from a social point. Groups of intermediary size and heterogeneity
provide the best effort and peer-monitoring incentives.