[Bellemare, M.F., Lee, Y.N. and Novak, L., 2021. Contract farming as partial insurance. World Development, 140, p.105274. https://doi.org/10.1016/j.worlddev.2020.105274]
A core result of contract theory is that contracts can help transfer risk from one party to another, the latter insuring the former. This study tests this prediction and explore the mechanism behind it in the context of contract farming, the economic institution wherein a processor contracts the production of a commodity to a grower. Specifically, they look at whether participation in contract farming is associated with lower levels of income variability in a sample of 1,200 households in Madagascar. Relying on a framed field experiment aimed at eliciting respondent marginal utility of participation in contract farming for identification in a selection-on-observables design, they find a systematic association between participation in contract farming and lower income variability. This suggests that contracts can be used as partial insurance mechanisms in places where insurance markets fail.
