Double moral hazard and relational contract : evidence from Ghana and experimental economics

Abstract

In developing countries, one of the main constraints for the development of value supply chains is side-selling and payment default by buyers. There is burgeoning literature examining financial and labour contracts in Sub-Saharan Africa, but less is known about informal contractual relations between buyers and sellers in agri-food markets. Yet, agribusiness development in Africa will depend on more stable contractual arrangements in food value chains. This study has two main aims: the first is to examine attributes of Ghanaian fresh vegetables supply chain contracts and second, to experimentally investigate the mitigation of double moral hazard in buyer-seller contracts. The first part of the study uses a survey method aiming to describe the nature of contracting and the factors determining contractual breaches by sellers. A logit regression results show that being an older farmer, distance to alternative market, monitoring and production management contract significantly increased side-selling while the time of contract price setting, time of payment, shorter contract relationship, and a farmer being a male positively influenced side-selling. The second study examines how an institution where buyers commit to a deposit of the value of payment agreed with the seller may resolve the contract breaches. This study aligns with the literature on informal and relational contracts, but rather than relying on repeated interactions and reputation it examines double moral hazard in a single shot game involving 294 participants. A buyer player proposes a contract price to a seller for the purchase of a commodity but can reduce the price ex-post. Similarly, the seller can side-sell the contracted commodity for a spot market price. The results show that fewer buyers voluntarily committed to a deposit of the payment but doing so resulted in a significantly less side-selling suggesting reciprocity in the seller’s behaviour. Moreover, anticipating that buyers may not voluntarily commit to a deposit, an institution that enforces a commitment to the deposit was examined and shown to further decrease side-selling.