Incentives and moral hazard: plot level productivity of factory-operated and outgrower-operated sugarcane production in Ethiopia

TY - JOUR

T1 - Incentives and moral hazard

T2 - plot level productivity of factory-operated and outgrower-operated sugarcane production in Ethiopia

AU - Wendimu, Mengistu Assefa

AU - Henningsen, Arne

AU - Czekaj, Tomasz Gerard

PY - 2017/9

Y1 - 2017/9

N2 - 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 these two production schemes using a cross-sectional plot-level data set. As sugarcane 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. 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.

AB - 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 these two production schemes using a cross-sectional plot-level data set. As sugarcane 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. 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.

KW - Incentives

KW - Large-scale plantation

KW - Nonparametric regression

KW - Outgrower schemes

KW - Productivity

U2 - 10.1111/agec.12356

DO - 10.1111/agec.12356

M3 - Journal article

AN - SCOPUS:85021718800

SN - 0169-5150

VL - 48

SP - 549

EP - 560

JO - Agricultural Economics (United Kingdom)

JF - Agricultural Economics (United Kingdom)

IS - 5

ER -