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Incentives and Moral Hazard: Plot Level Productivity of Factory-Operated and Outgrower-Operated Sugarcane Production in Ethiopia

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  • Mengistu Assefa Wendimu

    (Danish Institute for International Studies (DIIS), Natural Resources and Development
    Department of Food and Resource Economics, University of Copenhagen)

  • Arne Henningsen

    (Department of Food and Resource Economics, University of Copenhagen)

  • Tomasz Gerard Czekaj

    (Department of Food and Resource Economics, University of Copenhagen)

Abstract

We investigate the unique contractual arrangement between a large Ethiopian sugar factory and its adjacent outgrower associations. The only significant difference between the sugarcane production on the factory-operated sugarcane plantation and on the outgrower-operated plots is the remuneration system and thus, the incentives to the workers. We compare the productivity of the factory-operated plantation with the outgrower-operated plots based on a new cross-sectional plot-level data set that includes all plots that are operated by the sugar factory and its adjacent outgrower associations. As sugar-cane production depends on various exogenous factors that are measured as categorical variables (e.g. soil type, cane variety, etc.), we estimate the production function by a nonparametric kernel regression method that takes into account both continuous and categorical explanatory variables without assuming a functional form and without imposing restrictions on interactions between the explanatory variables. In order to obtain meaningful productivity measures, we impose monotonicity in input quantities using the constrained weighted bootstrapping (CWB) method. Our results show that outgrower-operated plots have−ceteris paribus−a statistically and economically significantly higher productivity than factory-operated plots, which can be explained by outgrowers having stronger incentives to put more effort into their work than the employees of the sugar factory.

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  • Mengistu Assefa Wendimu & Arne Henningsen & Tomasz Gerard Czekaj, 2015. "Incentives and Moral Hazard: Plot Level Productivity of Factory-Operated and Outgrower-Operated Sugarcane Production in Ethiopia," IFRO Working Paper 2015/02, University of Copenhagen, Department of Food and Resource Economics.
    • Handle: RePEc:foi:wpaper:2015_02
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    Cited by:

    1. Meilin Ma & Richard J. Sexton, 2021. "Modern agricultural value chains and the future of smallholder farming systems," Agricultural Economics, International Association of Agricultural Economists, vol. 52(4), pages 591-606, July.
    2. Wendimu, Mengistu Assefa & Henningsen, Arne & Gibbon, Peter, 2016. "Sugarcane Outgrowers in Ethiopia: “Forced” to Remain Poor?," World Development, Elsevier, vol. 83(C), pages 84-97.
    3. Moseki, Ofentse & Murray-Hudson, Michael & Kashe, Keotshephile, 2019. "Crop water and irrigation requirements of Jatropha curcas L. in semi-arid conditions of Botswana: applying the CROPWAT model," Agricultural Water Management, Elsevier, vol. 225(C).
    4. Bellemare, Marc F. & Bloem, Jeffrey R., 2018. "Does contract farming improve welfare? A review," World Development, Elsevier, vol. 112(C), pages 259-271.
    5. Jenifer Piesse & Beatrice Conradie & Colin Thirtle & Nick Vink, 2018. "Efficiency in wine grape production: comparing long†established and newly developed regions of South Africa," Agricultural Economics, International Association of Agricultural Economists, vol. 49(2), pages 203-212, March.
    6. Meilin Ma & Jessie Lin & Richard J. Sexton, 2022. "The Transition from Small to Large Farms in Developing Economies: A Welfare Analysis," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(1), pages 111-133, January.

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    More about this item

    Keywords

    Productivity; Outgrower schemes; large-scale plantation; agricultural workers; incentives; Nonparametric regression; Sugarcane; Ethiopia;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment

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