Enforcing contracts: The role of state subsidies as a hybrid enforcement mechanism in contracts between tomato processors and farmers in Algeria

Abstract

Motivation

Contract farming plays a significant role in the growth of agriculture in many countries. Contracting poses substantial challenges when courts and companies are insufficiently developed, constraining the fulfilment of contracts. Exploring innovative contract enforcement mechanisms could yield valuable insights.

Purpose

We evaluate the effectiveness of state subsidies as a hybrid enforcement mechanism of the marketing contract developed by the Algerian government for tomato processors and their farmer suppliers.

Approach and methods

We examine the delivery decisions of Algerian tomato farmers to honour contracts or to deliver to the spot market. From the findings we evaluated the direct and indirect effects of subsidies on expanding the self-enforcing range of contracts and on encouraging firms to establish private contract enforcement mechanisms. Propensity scoring was used to match farmers. The data come from a comprehensive database of contracted tomato producers and surveys of all tomato canneries in 2021.

Findings

Subsidies, by reducing processor costs and raising famer prices, help to make contracts self-enforcing. Subsidies, moreover, encouraged half of the processors to adopt private contract enforcement mechanisms, above all loans to their supplier farmers. These mechanisms have had a positive, albeit moderate, effect on farmer deliveries.

Farmers still deliver only half of their contracts owing to weakening self-enforcement as the subsidy can be accessed in the spot market.

Policy implications

Public subsidies can help enforce contracts in agricultural value chains, especially where legal systems are fragile. Strict control of access to subsidies and incentives is crucial to ensure that the contract price provides sufficient incentive to farmers and to encourage processors to provide additional incentives.