Tropentag, September 16 - 18, 2026, Göttingen "Towards multi-functional agro-ecosystems promoting climate-resilient futures"

Market price dominance in contract breach: A double lasso approach using experimental data from Ecuador

¹Universidad San Francisco de Quito , Science and Engineering, Ecuador
²National Polytechnic School, Dept of Mathematics, Ecuador
³University of Göttingen, Dept. of Agricultural Economics and Rural Development, Germany

Abstract

Contract farming is considered a means by which farmers and buyers in developing countries can, among other advantages, reduce price and market uncertainty and supply high value products to the export market. Nevertheless, contract breach is a pervasive problem that threatens the sustainability of the scheme. Both actors can face opportunism from their partner: producers can divert on the contract and deliver their produce to other buyers, or buyers can delay their payment, capturing additional value from producers.

We used a framed field experiment and a structured survey of 180 small broccoli farmers in the highlands of Ecuador to explore the factors influencing contract adoption and breach. In the experiment, where each farmer played 12 repetitions, the farmer who previously decided to engage in a fixed-price agreement, could decide to fulfil it or to sell the broccoli in the spot market where prices vary greatly. We further explored the effect of possible buyer´s opportunism on the probability of farmer´s breach. For this, we used a double LASSO-Heckman approach that applies L1 regularisation to both, the selection equation (contract acceptance) and the outcome equation (contract breach). The results show that market price dominates contract breach decisions, while other variables considered significant in standard models prove redundant. Selection bias is also significant and automatically considered through LASSO selection. Thus, farmers that enter a contract have specific characteristics that differentiate them from the rest of the population, and their decision to breach is mainly dominated by short-term profits. This reflects rational behaviour under incomplete enforcement. Interestingly, the probability of buyer´s opportunism doesn´t seem to increase the probability of farmer´s default. The implications of the results translate into the need for a better contract design under volatile market prices. Future research could focus on exploring the effectiveness of including price stabilisation mechanisms (e.g. floating price or a bonus) in the agreement, to avoid breach and make contracts more stable.

Keywords: Contract breach, field experiments, small farmers, vertical coordination

Contact Address: Cristina Romero Granja, Universidad San Francisco de Quito , Science and Engineering, Av. Diego de Robles & Vía Interoceánica, 170143 Quito, Ecuador, e-mail: cmromerogasig.com.ec