African Journal of
Agricultural Research

  • Abbreviation: Afr. J. Agric. Res.
  • Language: English
  • ISSN: 1991-637X
  • DOI: 10.5897/AJAR
  • Start Year: 2006
  • Published Articles: 6091

Full Length Research Paper

Reputation effect of the moral hazard on contract farming market development: Game theory application on rice farmers in Benin

Odountan Ambaliou Olounlade
  • Odountan Ambaliou Olounlade
  • Department of Agricultural Economics, College of Economics and Management, Huazhong Agricultural University, China.
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Li Gu-Cheng
  • Li Gu-Cheng
  • Department of Agricultural Economics, College of Economics and Management, Huazhong Agricultural University, China.
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Lacina Traore
  • Lacina Traore
  • Department of Agricultural Economics, College of Economics and Management, Huazhong Agricultural University, China.
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N’banan Ouattara
  • N’banan Ouattara
  • Department of Agricultural Economics, College of Economics and Management, Huazhong Agricultural University, China.
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François Vihôdé Dossouhoui
  • François Vihôdé Dossouhoui
  • Department of Economics, Socio-Anthropology and Communication, Faculty of Agricultural Sciences, University of Abomey-Calavi, Benin.
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Gauthier Biaou
  • Gauthier Biaou
  • Department of Agricultural Economics, National University of Agriculture of Benin, Benin.
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  •  Received: 04 February 2019
  •  Accepted: 22 March 2019
  •  Published: 28 March 2019

Abstract

A good reputation is the basis for rice farmers to survive and gain trust from buyers in a competitive business environment. However, due to the existence of information asymmetry between buyers and rice farmers, the moral hazard problem is the key obstacle that impedes the benefits of related shareholders and hinders the efficiency of contract farming negotiations. It is crucial to design a control mechanism to avoid the negative impact of the moral hazard. This paper studies the principal and agent relationship between rice farmers and buyer in contract farming negotiation. Because of the influence of information asymmetry, many buyers have suffered from being cheated by rice farmers who fail to comply with the terms of the contract or provide fraudulent products in practice. These frequent cases will function to deteriorate any long-term relationships between rice farmers and buyers. The study focuses on the analysis of the causes of moral risks and the effect of reputation on moral risk utilizing repeated game theory. The purpose of this paper is to help both rice farmers and buyers effectively avoid moral hazards and achieve a win-win situation in contract farming negotiation. The result show that the rice farmer in contract farming practices has the incentive to maintain his reputation in order to gain more profits in the future. That also accounts for the reasons why the rice farmer will invest more to improve the customer’s service level, caring about the quality of product and the comments of finished contractor customer, to keep a longer farmer-buyer relationship. The rice farmer in contract farming practices has the incentive to maintain his reputation in order to gain more profits in the future and this means that contract farming can be developed with great success in Benin.

Key words: Contract farming negotiation, moral hazard, reputation model, game theory, rice