IDEAS home Printed from https://ideas.repec.org/a/eee/jeborg/v180y2020icp129-147.html
   My bibliography  Save this article

Governance and contract choice: Theory and evidence from groundwater irrigation markets

Author

Listed:
  • Michler, Jeffrey D.
  • Wu, Steven Y.

Abstract

This paper examines the role governance institutions play in the adoption of contracts. We develop a simple model of the contracting relationship in a setting where unverifiable outcomes exist and use it to interpret data on groundwater irrigation contracts in Bangladesh. A distinguishing feature of this market is the variety of village-level institutions which impose different degrees of punishment for contract violation. Consistent with the model, we find households adopt contracts that rely on unverifiable outcomes, which are not formally contractible, when punishment for contract violation is weak. Conversely, households adopt contracts that rely on formally contractible and verifiable outcomes when punishment is severe. This evidence is consistent with contract terms being chosen optimally given what is or is not formally contractible.

Suggested Citation

  • Michler, Jeffrey D. & Wu, Steven Y., 2020. "Governance and contract choice: Theory and evidence from groundwater irrigation markets," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 129-147.
    • Handle: RePEc:eee:jeborg:v:180:y:2020:i:c:p:129-147
    DOI: 10.1016/j.jebo.2020.09.031
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167268120303656
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jebo.2020.09.031?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
    2. Edward P. Lazear, 2000. "The Power of Incentives," American Economic Review, American Economic Association, vol. 90(2), pages 410-414, May.
    3. Kajisa, Kei & Sakurai, Takeshi, 2005. "Efficiency and equity in groundwater markets: the case of Madhya Pradesh, India," Environment and Development Economics, Cambridge University Press, vol. 10(6), pages 801-819, December.
    4. Daniel A. Ackerberg & Maristella Botticini, 2002. "Endogenous Matching and the Empirical Determinants of Contract Form," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 564-591, June.
    5. Pol Antràs & C. Fritz Foley, 2015. "Poultry in Motion: A Study of International Trade Finance Practices," Journal of Political Economy, University of Chicago Press, vol. 123(4), pages 853-901.
    6. Stuart L. Gillan & Jay C. Hartzell & Robert Parrino, 2009. "Explicit versus Implicit Contracts: Evidence from CEO Employment Agreements," Journal of Finance, American Finance Association, vol. 64(4), pages 1629-1655, August.
    7. Papke, Leslie E. & Wooldridge, Jeffrey M., 2008. "Panel data methods for fractional response variables with an application to test pass rates," Journal of Econometrics, Elsevier, vol. 145(1-2), pages 121-133, July.
    8. Arouna, Aminou & Michler, Jeffrey D. & Lokossou, Jourdain C., 2021. "Contract farming and rural transformation: Evidence from a field experiment in Benin," Journal of Development Economics, Elsevier, vol. 151(C).
    9. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    10. Aggarwal, Rimjhim M., 2007. "Role of risk sharing and transaction costs in contract choice: Theory and evidence from groundwater contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 63(3), pages 475-496, July.
    11. Rocco Macchiavello & Ameet Morjaria, 2015. "The Value of Relationships: Evidence from a Supply Shock to Kenyan Rose Exports," American Economic Review, American Economic Association, vol. 105(9), pages 2911-2945, September.
    12. George Baker & Robert Gibbons & Kevin J. Murphy, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 1125-1156.
    13. Ansink, Erik & Houba, Harold, 2012. "Market power in water markets," Journal of Environmental Economics and Management, Elsevier, vol. 64(2), pages 237-252.
    14. Tsusaka, Takuji W. & Kajisa, Kei & Pede, Valerien O. & Aoyagi, Keitaro, 2015. "Neighborhood effects and social behavior: The case of irrigated and rainfed farmers in Bohol, the Philippines," Journal of Economic Behavior & Organization, Elsevier, vol. 118(C), pages 227-246.
    15. Harrison, Glenn W, 1992. "Theory and Misbehavior of First-Price Auctions: Reply," American Economic Review, American Economic Association, vol. 82(5), pages 1426-1443, December.
    16. Pavan Rao Chennamaneni & Ramarao Desiraju, 2011. "Comarketing Alliances: Should You Contract on Actions or Outcomes?," Management Science, INFORMS, vol. 57(4), pages 752-762, April.
    17. Banerji, A. & Meenakshi, J.V. & Khanna, Gauri, 2012. "Social contracts, markets and efficiency: Groundwater irrigation in North India," Journal of Development Economics, Elsevier, vol. 98(2), pages 228-237.
    18. Kenneth S. Corts, 2004. "The Effect of Repeated Interaction on Contract Choice: Evidence from Offshore Drilling," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 20(1), pages 230-260, April.
    19. Hanan G. Jacoby & Rinku Murgai & Saeed Ur Rehman, 2004. "Monopoly Power and Distribution in Fragmented Markets: The Case of Groundwater," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(3), pages 783-808.
    20. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts and the Theory of the Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 39-84.
    21. Schmidt, Klaus M. & Schnitzer, Monika, 1995. "The interaction of explicit and implicit contracts," Economics Letters, Elsevier, vol. 48(2), pages 193-199, May.
    22. Read, Daniel & Airoldi, Mara & Loewe, G, 2005. "Intertemporal tradeoffs priced in interest rates and amounts: a study of method variance," LSE Research Online Documents on Economics 19823, London School of Economics and Political Science, LSE Library.
    23. Simon Johnson & John McMillan, 2002. "Courts and Relational Contracts," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 18(1), pages 221-277, April.
    24. Abhijit V. Banerjee & Esther Duflo, 2000. "Reputation Effects and the Limits of Contracting: A Study of the Indian Software Industry," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(3), pages 989-1017.
    25. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-480, March.
    26. Marc F. Bellemare, 2012. "Insecure Land Rights and Share Tenancy: Evidence from Madagascar," Land Economics, University of Wisconsin Press, vol. 88(1), pages 155-180.
    27. Mundlak, Yair, 1978. "On the Pooling of Time Series and Cross Section Data," Econometrica, Econometric Society, vol. 46(1), pages 69-85, January.
    28. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
    29. Xavier Giné & Hanan G. Jacoby, 2020. "Contracting under uncertainty: Groundwater in South India," Quantitative Economics, Econometric Society, vol. 11(1), pages 399-435, January.
    30. Desrieux, Claudine & Chong, Eshien & Saussier, Stéphane, 2013. "Putting all one's eggs in one basket: Relational contracts and the management of local public services," Journal of Economic Behavior & Organization, Elsevier, vol. 89(C), pages 167-186.
    31. Ricard Gil, 2013. "The Interplay of Formal and Relational Contracts: Evidence from Movies," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 29(3), pages 681-710, June.
    32. Michael Raith, 2008. "Specific knowledge and performance measurement," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1059-1079, December.
    33. Simon Johnson & John McMillan & Christopher Woodruff, 2007. "Courts and Relational Contracts," Palgrave Macmillan Books, in: Erik Berglöf & Gérard Roland (ed.), The Economics of Transition, chapter 8, pages 243-297, Palgrave Macmillan.
    34. Smith, Steven M., 2018. "From decentralized to centralized irrigation management," Journal of Economic Behavior & Organization, Elsevier, vol. 151(C), pages 62-87.
    35. Maribeth Coller & Melonie Williams, 1999. "Eliciting Individual Discount Rates," Experimental Economics, Springer;Economic Science Association, vol. 2(2), pages 107-127, December.
    36. McMillan, John & Woodruff, Christopher, 1999. "Dispute Prevention without Courts in Vietnam," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 15(3), pages 637-658, October.
    37. Marc F. Bellemare, 2013. "The Productivity Impacts of Formal and Informal Land Rights: Evidence from Madagascar," Land Economics, University of Wisconsin Press, vol. 89(2), pages 272-290.
    38. Hermalin, Benjamin E. & Li, Larry & Naughton, Tony, 2013. "The relational underpinnings of formal contracting and the welfare consequences of legal system improvement," Economics Letters, Elsevier, vol. 119(1), pages 72-76.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Matthias Fahn & Giorgio Zanarone, 2021. "Pay Transparency Under Subjective Performance Evaluation," CESifo Working Paper Series 8849, CESifo.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ricard Gil & Giorgio Zanarone, 2018. "On the determinants and consequences of informal contracting," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 27(4), pages 726-741, October.
    2. Ricard Gil & Myongjin Kim & Giorgio Zanarone, 2019. "Relational Contracting in Developed Economies: Lessons From Slot Exchanges in the US Airline Industry," The Japanese Economic Review, Japanese Economic Association, vol. 70(3), pages 411-421, September.
    3. Daniel Barron & Robert Gibbons & Ricard Gil & Kevin J.Murphy, 2020. "Relational Adaptation Under Reel Authority," Management Science, INFORMS, vol. 66(5), pages 1868-1889, May.
    4. Ola Kvaløy & Trond E. Olsen, 2009. "Endogenous Verifiability and Relational Contracting," American Economic Review, American Economic Association, vol. 99(5), pages 2193-2208, December.
    5. Ricard Gil & Myongjin Kim & Giorgio Zanarone, 2022. "Relationships Under Stress: Relational Outsourcing in the U.S. Airline Industry After the 2008 Financial Crisis," Management Science, INFORMS, vol. 68(2), pages 1256-1277, February.
    6. W. Bentley MacLeod, 2006. "Reputations, Relationships and the Enforcement of Incomplete Contracts," CESifo Working Paper Series 1730, CESifo.
    7. Rocco Macchiavello & Ameet Morjaria, 2015. "The Value of Relationships: Evidence from a Supply Shock to Kenyan Rose Exports," American Economic Review, American Economic Association, vol. 105(9), pages 2911-2945, September.
    8. James M. Malcomson, 2012. "Relational Incentive Contracts [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    9. Contreras Oscar F. & Giorgio Zanarone, 2018. "Managing Social Comparison Costs in Organizations," Working Papers 2018-25, Banco de México.
    10. Hueth, Brent & Ligon, Ethan & Melkonyan, Tigran A., 2008. "Interactions between Explicit and Implicit Contracting: Evidence from California Agriculture," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6068, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    11. Nisvan Erkal & Steven Y. Wu & Brian E. Roe, 2022. "Correction to: Putting relational contract theory to the test: experimental evidence," Experimental Economics, Springer;Economic Science Association, vol. 25(1), pages 140-140, February.
    12. Matthias Fahn & Giorgio Zanarone, 2022. "Transparency in relational contracts," Strategic Management Journal, Wiley Blackwell, vol. 43(5), pages 1046-1071, May.
    13. Marta Troya-Martinez, 2013. "Vertical Relational Contracts and Trade Credit," Economics Series Working Papers 648, University of Oxford, Department of Economics.
    14. Macchiavello, Rocco & Miquel-Florensa, Josepa, 2017. "Vertical Integration and Relational Contracts: Evidence from the Costa Rica Coffee Chain," CEPR Discussion Papers 11874, C.E.P.R. Discussion Papers.
    15. Vincenzo Scoppa, 2003. "Contratti incompleti ed enforcement endogeno. Una rassegna della letteratura," Economia politica, Società editrice il Mulino, issue 3, pages 391-440.
    16. Nisvan Erkal & Steven Y. Wu & Brian E. Roe, 2022. "Putting relational contract theory to the test: experimental evidence," Experimental Economics, Springer;Economic Science Association, vol. 25(1), pages 111-139, February.
    17. Juan‐José Ganuza & Fernando Gomez, 2022. "Designing relational sanctions in buyer–supplier relationships," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(2), pages 470-491, April.
    18. Hideshi Itoh & Hodaka Morita, 2015. "Formal Contracts, Relational Contracts, and the Threat-Point Effect," American Economic Journal: Microeconomics, American Economic Association, vol. 7(3), pages 318-346, August.
    19. David A. Miller & Joel Watson, 2013. "A Theory of Disagreement in Repeated Games With Bargaining," Econometrica, Econometric Society, vol. 81(6), pages 2303-2350, November.
    20. Ola Kvaløy & Trond E. Olsen, 2006. "Team Incentives in Relational Employment Contracts," Journal of Labor Economics, University of Chicago Press, vol. 24(1), pages 139-170, January.

    More about this item

    Keywords

    Contract enforcement; Formal and relational contracting; Verifiability problem; Institutions; Bangladesh;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:180:y:2020:i:c:p:129-147. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jebo .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.