Investigating the Principal-agent Problem among Market Women and Smallholder Farmers in Ghana

Abstract

The Principal-Agent Problem elaborates on how one party of contract possesses more of the relevant information with respect to contract arrangement than the other party, which often leads to the issue of Moral Hazard and Adverse Selection. Farmers and agribusiness owners sometimes enter into such an agreement, where the agribusiness (Principal) supplies or pre-finances the farming activities of the farmer in a crop season, and the farmer (Agent), in turn, sells the farm produce to the agribusiness owner after harvest, with a pre-arranged price, irrespective of the ruling or current market price levels. Objective: The main objective of the study is to investigate whether the Principal–Agent Problem exists within small and medium scale agribusiness in Ghana; specifically, to estimate the effect of previous year’s phenomena such as market prices, rainfall pattern and output levels on optimal franchise fees agreed on by both the Principal and the Agent, determine how asymmetric information influences the Principal-Agent Problem in an empirical studies, and examine whether moral hazard and adverse selection affect the Principals decision to award the contract to the agent to work for him/her (the principal). Methodology: Descriptive statistics and the logit regression estimation techniques were used to investigate variables involved in the study. Using purposive sampling, a total of 20 Microfinance Institutions, 100 market women and 100 Smallholder farmers were interviewed in local communities of Asante and Bono Regions. STATA 11.0 version was used to estimate the Logit regression results for the specified model. The model was evaluated or analyzed with both p-values and the coefficients for the purpose of statistical inferences and determination of the significance of the explanatory variables in the model for the study. Findings: The study finds a positive and significant relationship between previous year’s market prices, output level and rainfall pattern and the optimal franchise fee decision in the contract. Asymmetric information was also found to be a significant determinant of the contract agreement.