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Heterogeneous incentives for innovation adoption: The price effect on segmented markets

t is now commonly accepted that poverty alleviation and the development of agricultural value chains in low income countries require farmers to innovate. However numerous constraints to innovation adoption have been identified. In the literature, the market structures on which producers sell their output have received remarkably little attention. In this article, I argue that these can impact a producer's choices with respect to the level of effort invested in changing agricultural practices.

The Importance of Standards

Quality standards are increasingly important for farmers to be able to export in high-value markets. Two case studies illustrate both the risks and the potential benefits for farmers related to meeting export standards. Farmers in Kenya defaulted after having their produce refused by an exporter for failing to adhere to export standards. In Honduras, Wal-Mart was able to enforce the practices needed to export jalapeno peppers.

Contract farming
Contract farming involves production by farmers under agreement with buyers for their outputs. This arrangement can help integrate small-scale farmers into modern agricultural value chains, providing them with inputs, technical assistance, and assured markets. Critics contend that contract partners may subject farmers to abuses.
Contract Farming and Smallholder Incentives to Produce High Quality: Experimental evidence from the Vietnamese Dairy Sector

Producer penalties and bonuses can help reduce the incidence of side-selling and better align farmers' incentives with purchasers'. Bonuses can help ensure that farmers take the necessary measurements to produce the quality characteristics often present in contract farming arrangements. A randomized controlled experiment with milk producers in Vietnam showed that the presence of penalties and bonuses drove farmers to higher input use which resulted in higher quality milk.

Potential Collusion and Trust: Evidence from a Field Experiment in Vietnam

Part of the constraints facing contract farming are the lack of proper procedures for measuring quality in production. If the buyer handles quality assurance then they may have an incentive to report that production was of lower quality in order to offer a lower price. The producer knowing this, in turn will lower their expectation to the income from contact farming and be less likely to contract.

Contract Farming Handbook

Sound planning, appropriate skills and adequate approaches for starting-up and operating contract farming (CF) schemes are key to success and sustainability. Therefore GIZ has issued the “Contract Farming Handbook”, which provides a practical and process-oriented approach guiding practitioners through sound planning, starting up, consolidation and up-scaling of CF schemes.

UNIDROIT/FAO/IFAD Legal Guide on Contract Farming

The UNIDROIT/FAO/IFAD Legal Guide on Contract Farming is an important resource for designing contract farming arrangements. It provides advice and guidance on the entire relationship, from negotiation to conclusion, including performance and possible breach or termination of the contract. The Guide provides a description of common contract terms and a discussion of legal issues and critical problems that may arise under various practical situations, illustrating how they may be treated under different legal systems.

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