Third-Party Facilitation of Investments in Private Enforcement Capital: Evidence from Armenian Dairy Industry

Globalization and the changing structure of agri-food procurement channels have forced governments and international development community to shift their efforts towards linking farmers to markets through high value added contractual marketing relationships. A critical pre-condition for establishing economically sustainable value chain linkages is the presence of effective contract enforcement mechanisms. In many countries both public and private contract enforcement is poor resulting in high hold-up risk and underinvestment into relationships. This creates an immense challenge for donors and policy makers in facilitating sustainable relationships along the supply chain. This study explores the key elements in the design and implementation of assistance programs that could stimulate development of private contract enforcement mechanisms and improve sustainability of market linkages where the public enforcement is inadequate and the FDI is not present. The analyses are based on the probabilistic hold-up framework and the case of the USDA Marketing Assistance Program in Armenian dairy industry. Findings indicate that incorporation of strategies that stimulate development of private enforcement mechanisms in the design and implementation of market linkage programs by donor and development agencies may lead to establishment of self-enforced supply chain relationships, higher likelihood of long run economic sustainability, and higher program impact for constituents