Incentives, Transaction Costs and Social Capital Considerations in Determination of Contract Duration in the Kenyan Smallholder Horticultural Sub-Sector

Abstract

A multinomial regression is used on data from a survey of French bean smallholders to analyse duration of business to farm business relations in horticulture farming conditional on incentives, transaction cost minimization and social capital. Average marginal effects return a higher probability of short duration given a higher number of farmer neighbours and farms located further from the village indicating dependence on social networks and avoidance of competition for farm supplies. The probability of long duration is higher if farmers have access to credit and prior information on prices, large farm area under beans and contractual experience, if selected to farm beans and if a farmer knows a higher number of farmers selling to the same buyer, if a farmer uses a supply contract and the farm is further from the source of irrigation water. This suggests that long duration exchanges are based on high powered incentives, transaction cost reduction, social capital and control of quality supplies. It is concluded that the success of production and market intervention programs in the smallholder sector will require buyers to exploit social networks, use production and output incentives and build on existing farmer expertise.

Keywords: contract duration; incentives; transaction costs; social capital; smallholders; Kenya