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I study the economic consequences of shifting bargaining power in relational contracts through interventions such as the formation of a Bargaining Group (BG) for the side of sellers in a market where buyers traditionally hold significant market power. Existing theories of relational contracts predict that such a power transfer will have no impact on market efficiency. In contexts where enforcement institutions are weak,a standard assumption from existing theories of relational contracts - the existence of an enforceable base payment - may not hold. In this case, I show that a transfer of bargaining power can erode market efficiencyin a dynamic relational contracting environment, which contradicts findings from existing models of relational contracting. When buyers hold significant market power, they forgo short-term opportunistic behavior by honoring promised performance bonuses in order to keep sellers engaged in trade over time and to accumulate surplus over many periods. With market power eroded by interventions such as the BG, buyers’long-run gains to trade shirk. When this is coupled with the absence of an enforceable base payment, short-term opportunistic behavior becomes more appealing and trade is more likely to break down. The results here provide policy-makers insight into the economic consequences of enacting policies attempting to balance market power within a framework of fully informal contract enforcement.

Keywords: contracts ; incomplete enforcement ; bargaining group ; distribution ; institutions

Subject(s): Agribusiness

Agricultural and Food Policy

Industrial Organization

Institutional and Behavioral Economics

International Development

Issue Date: 2009

Publication Type: Conference Paper/ Presentation

PURL Identifier: Page range: 2-31

Total Pages: 31

JEL Codes: D86; K12; L14; O12; Q13.

Series Statement: Selected Paper


Record appears in: Agricultural and Applied Economics Association (AAEA) > 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin

Autor: Cordero Salas, Paula


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