Expansion of Farmers’ Economic Welfare Through Contract Farming in Tanzania: A Four Case Analysis

Abstract

This paper draws from the law and economics discipline theories of economic organization, agency, property rights, transaction costs and new institutional economics to analyse the state of smallholder farmers’ welfare wrought by contract farming. These theories explain how the legal system (formal) and informal rules affect the economic agents such as farmers who supply agricultural produce to the factories under contracts. Using data collected from four case studies through induction approach, the paper develops a farmer’s behaviour model that delineates the farmers’ welfare development path from training and acquired agronomic knowledge. The model demonstrates that training results into a positive reward, despite a number of revealed contractual enforcement constraints. The contracts are still being affected by opportunism, information asymmetry and bounded rationality problems leading to high transaction costs in enforcement. The paper also discusses a number of solutions that can mitigate the different economic organisational problems in governing contracting agents in the value chain of agro-industry in Tanzania.