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Incentive Contracts for Horticulture Producers in Senegal

Development Challenge

Many smallholder farmers across sub-Saharan Africa lack access to stable product markets. Due to high transportation costs they are forced to sell their crops locally and are thus subject to dramatic price fluctuation. Farmers are unable to predict how much a given harvest will earn them and consistently face income instability. As a result, they cannot invest in upgrading or modernizing their operations and remain unable to disrupt the cycle of low output and volatile prices.

Context

In the Senegal River Valley, onion production has developed rapidly in recent years. Onions are a high value crop and therefore could offer a valuable opportunity for smallholders; however, because such farmers lack access to stable markets, they do not fully capture potential returns. Most small farmers must rely on “coaxers”, or consignment agents, who sell their output in local, volatile markets. Currently, coaxers earn a fixed fee, thus, they focus on the volume sold and have no incentive to ensure that farmers receive the best possible price or to charge more for higher quality products. This results in unpredictable prices that do not maximize farmer returns, and do not give them incentives to invest in technologies for quality upgrading. Currently 15,000 households in the Senegal River Valley produce onions and rely, to a large extent, on coaxers for the sale of their produce. This study collaborates with the Senegalese Market Regulation Agency (ARM) and the Senegalese National Agency for the Support of Agriculture in the Senegal River Valley (SAED) to target between 1,500 and 1,800 households at four local selling or collection points.

Evaluation Strategy

Researchers investigate whether shifting from fixed fee to incentive-based contracts with coaxers may increase farmer returns and whether this, in turn, may increase farmers’ post-harvest technology adoption. In this experiment, farmers are randomly assigned to two groups. The first serves as a comparison and continues to use fixed fee contracts with coaxers. Farmers in the second group have the option to continue using fixed fee contracts or try an incentive-based contract where the coaxer’s fee is a share of the price received. While each farmer picks from only two choices – fixed fee or incentive-based – three different incentive based contracts are evaluated: a 2.5 percent return of sale value for coaxers, a five percent return, and a ten percent return. To test all three incentive-based contracts, coaxers offer only one contract at a time and randomly rotate which percentage they offer every three weeks over a 24 week span. This randomized evaluation process will determine the willingness of farmers to enter into incentive-based contracts, and which of the three incentive-based contracts maximizes the return for the farmers and coaxers alike.

In the following year, the study will evaluate the impact of incentive-based contracts on post-harvest technology adoption, such as new methods for sorting, drying and storing. Farmers will again be randomly assigned into two groups. Those in the treatment group will be given the choice to continue with a fixed fee contract or to enter into the incentive-based contract previously identified as maximizing both farmer and coaxer returns, whereas those in the comparison group will only be offered fixed fee contracts. Because farmers will have already seen the results of entering into an incentive-based contract from their previous year’s interactions with coaxers, they will be more informed of the potential returns from investing into quality enhancement. Rates of post-harvest technology adoption will be evaluated for both groups. The results will determine whether incentive based contracts improve income stability, and whether this leads to more post-harvest technology adoption toward quality improvement.

Results and Policy Implications

Project Ongoing, Results Forthcoming

Timeline

2012 -