Dual moral hazard and adverse selection in South African agribusiness: it takes two to tango

Abstract

The paper employs a dual moral hazard and adverse selection model to analyse partnerships in agribusiness under joint venture contracts with asymmetric information and imperfect quality measurement by the agent and principal both of which contribute to the final quality of the product in terms of production effort and marketing (offtake) effort, respectively. A salient feature of this paper is the analysis of the ramifications of joint venture contract for quantity and quality, which is often deficient in most previous analyses of moral hazard. The research found that contracts that have rewards based on the quantity produced weakened the agent’s incentive to make effort in ensuring quality. This finding could explain why most contracts in agriculture for products with differentiated markets rarely use retail-price conditioned contracts.