This study makes a case for theorizing contract farming as institutions that operate over a domain, rather than as mere technical arrangements for risk sharing between two economic actors. It advocates using the contract farming system as a unit of analysis and dismantling the composite principal-agent problem into its constituent stages, of contracting, of honoring agreed contracts
and of contract enforcement. Each of these stages contains elements of friction that define the substantive features of the arrangement. Contract farming then emerges and sustains as frictional equilibria over the domain, where in the face of uncertainty and imperfect information, firm and farmers develop and update robust subjective assessments regarding the other’s behavior and use these to make decisions on whether to contract and whether or not to honor the contract. This approach admits the possibility of incorporating the heterogeneity of contracting experiences, of incorporating the social aspects of transactions and acknowledging explicitly the dynamic elements of these arrangements. Theorizing contract farming as institutions allows a framework that can potentially resolve many apparent contradictions regarding the normative implications of contract farming. The empirical part of this study takes this theoretical apparatus to investigate five contract farming schemes in southern India, broiler, cotton, gherkins, marigold and papaya, using a unique data for 822 contract and non-contract farmers collected between 2007 and 2009. The
empirical analysis focuses first on the contracting stage, where firms and farmers match up to contract, examining the role mutual perceptions of risks and a firm’s considerations of geographies in determining contract participation. The study then assesses the welfare gains from participating in contracting, suggesting that there is considerable variation in outcomes, both across schemes and farmers within a scheme, providing the ingredients for churning in participation, or dynamics in a firm’s portfolio of contract farmers over time. The study also looks at enforcement problems in these schemes. In the context of weak public enforcement of contracts through courts, firms typically leverage relationship-based incentives along with price-based incentives to improve contractual compliance. Overall, the empirical analysis suggests that despite many positive welfare implications
of contract farming arrangements, several frictional elements in the contracting domain seriously limit the instrumentality of contract farming for poverty alleviation in developing countries.
