P Property rights and their enforcement are often uncertain. Contracting arrangements and
contract enforcement become more important as firms increase their reliance on more
capital-intensive, specialized, and productive production processes. Property rights
established by state government and local traditional hierarchies are often in conflict, with
uncertain procedures for resolving the competing jurisdictional boundaries. Gray areas in
the structure of property rights leave room for economic outcomes to be determined by
power relations and opportunistic behavior. This creates riskiness that impedes
investment.
For example, what rights do lender and borrower have if an investment fails? What are
the rules for allocating credit among potential borrowers? If an agricultural input is
purchased on credit, is the credit contract enforced if the purchased input was not what
was promised? Different ways of resolving these questions affect costs and thus the
amount of credit supplied and demanded, with implications for input use and agricultural
productivity. Foreign investors and firms can make great contributions to agricultural
systems. What are the rules that will promote foreign investment and at the same time
protect against exploitation? The solution is in the details.
• Limited vertical coordination or integration between input delivery, farm finance, and
crop sale. Most grain traders tend to be passive, accepting the surpluses that farmers
bring to their store rather than identifying potential markets and then actively promoting
production to supply them (Shaffer et al. 1985). Larger-scale assembly-wholesaler firms
would find it in their interest to link farmers and retailers, providing both groups much
needed services, technical inputs and credit, and, most important, reliable markets.
However, such coordination is limited by many problems in relationships including lack of
trust, opportunistic behavior and the absence of governance institutions that define
unacceptable business practices and provide low-cost enforcement of contracts. For
example, farmers are not in a position to determine the composition of the material in a
bag of fertilizer. What is the most effective method of assuring they get what they pay
for? Sue the distributor in court? Provide a national inspection service? Have extension
agents offer testing services? Promote competition with advertising and branded
products? All of these options require government or another collective agency to
provide a “public goods” role. But without analysis of the alternatives, we have little
information to guide policymakers in what may be the most effective way to develop these
markets.
• Limited public market information makes planning difficult. Some kinds of exchange
arrangements, e.g., futures markets, produce public market information about the future,
which enable individuals to shift risks. When acquiring information on market conditions
is costly (e.g., due to poor communication infrastructures or missing markets), this leads
to asymmetric information across market participants and incomplete specification of
property rights and enforcement.
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