Careers in Farming: Evidence from the Chilean Wine-grape Market

This paper investigates the presence of career incentives in arm's-length contracts between wine-grape farmers and wineries in Chile. We observe explicit incentives in pay-for-performance provisions that depend on measurable characteristics of grape quality, and we test for the presence of complementary implicit incentives that arise from competition in the market for contract farmers. In addition to the traditional use of long-term contracts as ex ante protection against potential future hold-up, we hypothesize that long-term contracts represent the final stage in the farmers' "careers" after a series of short-term contracts. We develop a model of career concerns that incorporates investment in training by wineries and find conditions under which long-term contracts are preferred to short-term contracts. We find that contracts in the Chilean wine-grape market are structured like a ladder and that career incentives are important in a setting which uses long-term contracts for high-quality provision. In general, farmers that have invested in high-quality production, and those that are more able, educated, and experienced can access long-term contracts.