Coordination mechanisms for quality improvement and market access in Ethiopian potato value chains

Market access for smallholders in developing countries often requires the improvement of product quality. As products are traded in value chains, quality improvement entails the coordination of activities and decisions by all actors in the chain. Thus, enhancing smallholders’ commercialization requires, for instance, making significant investment in production technologies, availing market oriented varieties, and establishing well-functioning input and output markets. Markets are one form of institutions providing coordination functions. From the perspective of new institutional economics (NIE), there are also other types of institutions (e.g., contract farming, producer organizations, etc.) facilitating economic exchange, This thesis aims to gain insights into the factors affecting smallholders to improve quality and market access by analyzing their relationship with upstream and downstream actors and generateinformation relevant for the development of sustainable value chains in the potato sector. The thesis has demonstrated that farmers’ assessment of production- and market-related attributes of local potato varieties strongly influence their decision to adopt improved varieties (IVs). Thus, enhancing the uptake of IVs requires development of varieties with market-related quality attributes, adequate information exchanges, and joint (or delegated) decision-making. Regarding smallholders’ downstream relationship, most transactions are carried out at farmgate. This type of arrangement has provided a better opportunity for buyers to closely monitor quality and for smallholders to minimize the risk of opportunism in the spot market. In farmer-buyer relationships, coordination is largely enforced through reputation effects and repeated interactions. Although farmgate and trust-based contractual relationships can provide better incentives to improve quality, smallholder commercialization in highly ruminative markers, such as the regional market, needs more integrated type of coordination, such as contract farming arrangement.To this effect, the thesis provides an analytical framework to analyse contractual relations in a contract farming scheme by conceptualizing smallholders’ preferences as a multi-category discrete choice problem, where the choice of a contract is modelled as a set of different contract design attributes. Smallholders’ preferences for specific contract design attributes can largely be explained from the perspective of smallholders’ risk aversion behaviour and entrepreneurship traits. The findings showed that smallholders’ willingness to participate in a contract farming scheme increases if the contractual relationship is based on a written form; inputs, technical assistance, and seed supplied by the buyer firm; and variable output quality and variable price specifications. While the uncertainty in the input market motivates farmers for participation, the risk of underpayment (when accepting a fixed-price contract) and the lack of freedom to make autonomous decisions in the output market tend to refrain them from participation. In this regard, the thesis has provided an argument about the significance of institutional support (for instance, supplying the necessary inputs through farmer organizations) and flexible contracts to ease the tension and thus to stimulate smallholders to participate in contract farming.