Institutional Innovation in Farmer-Trader Exchange Practices in the Indonesian Shallot Market

• Author / Creator

  Zeppa, Victoria S

• When agricultural markets do not function well, the results can impose disproportionate negative effects on smallholder farmers (FAO, 2010). These effects are exacerbated when markets for key inputs, such as skilled labour, are missing or incomplete (de Janvry et al., 1991). To reduce risk and transaction costs in imperfect markets, informal institutions manifest to facilitate economic exchange. However, while informal institutions can set the stage for formal market emergence (McMillan, 1995), they can also impede market growth by fostering underdevelopment (e.g. Shaban, 1987). Before the impact that individual institutions have on economic development can be assessed, it is critical to understand the specific causes for their emergence in different contexts. An ideal microcosm for this research agenda is exploring the existence of tebasan, an informal harvesting institution that has spread to a number of agricultural commodity markets in Indonesia. Using a tebasan arrangement, a farmer agrees to a pre-harvest sale of her or his mature crop to a trader. The trader then assumes the responsibility for the costs associated with harvesting and selling, as well as potential processing activities. Subsequently, the trader becomes the sole residual claimant on the harvest output. It is believed that tebasan arrangements first manifested in response to increased pressure in supervising harvest labour (Hayami and Hafid, 1979). The objective of this thesis is to identify factors that lead farmers to use tebasan arrangements in Indonesia’s shallot market. To do this, the interplay of the input and output market challenges faced by farmers is modeled using a theoretical framework proposed by Eswaran and Kotwal (1985). This framework demonstrates that the evolution of institutions may be a response to rural market development. It is tested whether the farmer’s choice to use a tebasan arrangement, or to self-harvest, is determined by the relative importance of two key non-marketed inputs, which can only be accessed by the different arrangements available. The first input, which the farmer has a comparative advantage in, is harvest labour supervision. This is the ability to manage labour during the harvest. The second input, in which the trader is superior, is market management. That is, the ability to coordinate labour hiring and other market activities to process and sell the harvested crop. The extent of the role that each party has in the harvest, as defined by the arrangement choice, therefore depends on the relative importance of these two inputs in the harvesting, processing and selling activities. It also depends on the availability of similar services from other sources, such as formal markets, and changes in the farm’s internal environment. To empirically test the key tenets of this theoretical model, a dataset including household and farm information on 564 shallot farmers is used. The data were collected in the primary shallot-producing region of Brebes Regency, Java in 2011 through a household survey. The University of Adelaide’s Global Food Study Research Unit led the data collection activities. Data published in 2013 by Brebes’ Bureau of Statistics is also employed. A probit model is used to econometrically test the framework’s main hypothesis that the farmer’s arrangement choice is driven by differences in the farmer’s/trader’s comparative advantage in the two non-marketed inputs. The main explanatory variables include: proxies for market development, and input and output market intensification, factor input intensities and several control variables. The results provide empirical evidence supporting the main predictions of Eswaran and Kotwal’s (1985) theoretical model. Market development negatively affects the probability of the farmer choosing a tebasan arrangement, while output market intensification has a positive effect. These findings demonstrate that farmers will choose a tebasan arrangement, placing a relatively high value on the trader’s superior market management ability in harvesting and selling, when markets are underdeveloped and characterized by intensive production centers. The findings also show that farm characteristics impact arrangement choice: the greater the farmer’s family labour intensity, the less likely a tebasan arrangement will be chosen. Therefore, this thesis provides empirical support for economic theory by revealing new incentive mechanisms that are being negotiated to manage the harvest in an imperfect market. These findings suggest that tebasan arrangements may be substituting for an imperfect market for managerial services, which has broad policy implications for enhancing the efficiency of Indonesia’s shallot market.

• Subjects / Keywords

  • Managerial skills
  • Smallholder Farmer
  • Tebasan
  • Market Access
  • Informal institutions
  • Trader

• Graduation date

  Fall 2016

• Type of Item

  Thesis

• Degree

  Master of Science

• DOI

  https://doi.org/10.7939/R3K931H5X

• License

  This thesis is made available by the University of Alberta Libraries with permission of the copyright owner solely for non-commercial purposes. This thesis, or any portion thereof, may not otherwise be copied or reproduced without the written consent of the copyright owner, except to the extent permitted by Canadian copyright law.