Date post: | 02-Jun-2018 |
Category: |
Documents |
Upload: | irrisocialsciences |
View: | 218 times |
Download: | 0 times |
of 61
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
1/61
Introduction Irrigation Contracts Data & Results Conclusions
The Effects of Governance on Relational andFormal Contracts:
Theory and Evidence from Groundwater Irrigation Markets
Jeffrey D. Michler Steven Y. Wu
Department of Agricultural EconomicsPurdue University
IRRI SSD Seminar
Los Banos, Philippines
5 November 2014
Michler (Purdue) Contracts for Groundwater Irrigation 1/27
IRRI 2014 1 / 27
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
2/61
Introduction Irrigation Contracts Data & Results Conclusions
Land Tenure Contracts
Hayami and Otsuka (1993) inThe Economics of Contract Choice: An
Agrarian Perspectivedevelop a general theory of land tenure
contracts. They look to explain...
Why there is a variety of land tenure contracts
Why some contracts are preferred to other contracts
The role of risk sharing in contract choice
Interlinkages between tenure contracts and credit
How contracts are enforced despite poor legal system
Michler (Purdue) Contracts for Groundwater Irrigation 2/27
IRRI 2014 2 / 27
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
3/61
Introduction Irrigation Contracts Data & Results Conclusions
Land Tenure Contracts
Hayami and Otsuka (1993) inThe Economics of Contract Choice: An
Agrarian Perspectivedevelop a general theory of land tenure
contracts. They look to explain...
Why there is a variety of land tenure contracts
Why some contracts are preferred to other contracts
The role of risk sharing in contract choice
Interlinkages between tenure contracts and credit
How contracts are enforced despite poor legal system
Michler (Purdue) Contracts for Groundwater Irrigation 2/27
IRRI 2014 2 / 27
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
4/61
Introduction Irrigation Contracts Data & Results Conclusions
Land Tenure Contracts
Hayami and Otsuka (1993) inThe Economics of Contract Choice: An
Agrarian Perspectivedevelop a general theory of land tenure
contracts. They look to explain...
Why there is a variety of land tenure contracts
Why some contracts are preferred to other contracts
The role of risk sharing in contract choice
Interlinkages between tenure contracts and credit
How contracts are enforced despite poor legal system
Michler (Purdue) Contracts for Groundwater Irrigation 2/27 IRRI 2014 2 / 27
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
5/61
Introduction Irrigation Contracts Data & Results Conclusions
Land Tenure Contracts
Hayami and Otsuka (1993) inThe Economics of Contract Choice: An
Agrarian Perspectivedevelop a general theory of land tenure
contracts. They look to explain...
Why there is a variety of land tenure contracts
Why some contracts are preferred to other contracts
The role of risk sharing in contract choice
Interlinkages between tenure contracts and credit
How contracts are enforced despite poor legal system
Michler (Purdue) Contracts for Groundwater Irrigation 2/27 IRRI 2014 2 / 27
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
6/61
Introduction Irrigation Contracts Data & Results Conclusions
Land Tenure Contracts
Hayami and Otsuka (1993) inThe Economics of Contract Choice: An
Agrarian Perspectivedevelop a general theory of land tenure
contracts. They look to explain...
Why there is a variety of land tenure contracts
Why some contracts are preferred to other contracts
The role of risk sharing in contract choice
Interlinkages between tenure contracts and credit
How contracts are enforced despite poor legal system
Michler (Purdue) Contracts for Groundwater Irrigation 2/27 IRRI 2014 2 / 27
C C
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
7/61
Introduction Irrigation Contracts Data & Results Conclusions
Land Tenure Contracts
Hayami and Otsuka (1993) inThe Economics of Contract Choice: An
Agrarian Perspectivedevelop a general theory of land tenure
contracts. They look to explain...
Why there is a variety of land tenure contracts
Why some contracts are preferred to other contracts
The role of risk sharing in contract choice
Interlinkages between tenure contracts and credit
How contracts are enforced despite poor legal system
Michler (Purdue) Contracts for Groundwater Irrigation 2/27 IRRI 2014 2 / 27
I t d ti I i ti C t t D t & R lt C l i
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
8/61
Introduction Irrigation Contracts Data & Results Conclusions
Groundwater Contracts
Mukherji (2004)
There has so far been no attempt at formulating a general theory of
groundwater markets. Thus, the current mode of functioning of
groundwater markets still leaves a lot of unanswered questions such
as why do several modes of water contracts coexist under seemingly
similar conditions and why do they respond differently to similar sets of
incentives and disincentives?
Michler (Purdue) Contracts for Groundwater Irrigation 3/27 IRRI 2014 3 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
9/61
Introduction Irrigation Contracts Data & Results Conclusions
Motivation
Observation
Markets for groundwater irrigation are informal and unregulated
Research Questions
1. Why do farmers choose to use a particular type of contract?
2. What is the role of different types of governance in determining
contract choice?
Michler (Purdue) Contracts for Groundwater Irrigation 4/27 IRRI 2014 4 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
10/61
Introduction Irrigation Contracts Data & Results Conclusions
Motivation
Observation
Markets for groundwater irrigation are informal and unregulated
Research Questions
1. Why do farmers choose to use a particular type of contract?
2. What is the role of different types of governance in determining
contract choice?
Michler (Purdue) Contracts for Groundwater Irrigation 4/27 IRRI 2014 4 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
11/61
Introduction Irrigation Contracts Data & Results Conclusions
Implications
Contract choice involves balancing an inter-temporal trade-off:
Short-term: exploit groundwater to maximize production and
achieve or maintain food security. Long-term: conserve groundwater to insure against risk posed by
future extreme environmental events.
How do we design interventions or new market mechanisms to ensure
groundwater conservation while continuing largeBororice yields?
Michler (Purdue) Contracts for Groundwater Irrigation 5/27 IRRI 2014 5 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
12/61
Introduction Irrigation Contracts Data & Results Conclusions
Implications
Contract choice involves balancing an inter-temporal trade-off:
Short-term: exploit groundwater to maximize production and
achieve or maintain food security. Long-term: conserve groundwater to insure against risk posed by
future extreme environmental events.
How do we design interventions or new market mechanisms to ensure
groundwater conservation while continuing largeBororice yields?
Michler (Purdue) Contracts for Groundwater Irrigation 5/27 IRRI 2014 5 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
13/61
Introduction Irrigation Contracts Data & Results Conclusions
Methodology
Relational Contract Theory
We adapt a theoretical model of human behavior and institutional
governance developed by Dixit (2004). Allows us to think of contracting as a non-cooperative game with
contracts distinguished by who has the last move in the game.
Explains how contracts remain effective despite a lack of outside
enforcement.
Michler (Purdue) Contracts for Groundwater Irrigation 6/27 IRRI 2014 6 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
14/61
g
Types of Water Contracts
Fixed Charge- One-time fee paid by buyer at start of season for
water throughout season
Labor Charge- Buyer provides labor throughout season to seller
in exchange for water
Piece Rate- Buyer pays fee for each application throughoutseason
Output Share- One-time fee paid at end of season and
dependent on crop yield
Input Share- Seller provides inputs to buyer in exchange forlarger output share
Fixed Rent- One-time fee paid by seller at start of season for use
of land
Michler (Purdue) Contracts for Groundwater Irrigation 7/27 IRRI 2014 7 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
15/61
g
Types of Water Contracts
Fixed Charge- One-time fee paid by buyer at start of season for
water throughout season
Labor Charge- Buyer provides labor throughout season to seller
in exchange for water
Piece Rate- Buyer pays fee for each application throughoutseason
Output Share- One-time fee paid at end of season and
dependent on crop yield
Input Share- Seller provides inputs to buyer in exchange forlarger output share
Fixed Rent- One-time fee paid by seller at start of season for use
of land
Michler (Purdue) Contracts for Groundwater Irrigation 7/27 IRRI 2014 7 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
16/61
Types of Water Contracts
Fixed Charge- One-time fee paid by buyer at start of season for
water throughout season
Labor Charge- Buyer provides labor throughout season to seller
in exchange for water
Piece Rate- Buyer pays fee for each application throughoutseason
Output Share- One-time fee paid at end of season and
dependent on crop yield
Input Share- Seller provides inputs to buyer in exchange forlarger output share
Fixed Rent- One-time fee paid by seller at start of season for use
of land
Michler (Purdue) Contracts for Groundwater Irrigation 7/27 IRRI 2014 7 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
17/61
Types of Water Contracts
Fixed Charge- One-time fee paid by buyer at start of season for
water throughout season
Labor Charge- Buyer provides labor throughout season to seller
in exchange for water
Piece Rate- Buyer pays fee for each application throughoutseason
Output Share- One-time fee paid at end of season and
dependent on crop yield
Input Share- Seller provides inputs to buyer in exchange forlarger output share
Fixed Rent- One-time fee paid by seller at start of season for use
of land
Michler (Purdue) Contracts for Groundwater Irrigation 7/27 IRRI 2014 7 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
18/61
Types of Water Contracts
Fixed Charge- One-time fee paid by buyer at start of season for
water throughout season
Labor Charge- Buyer provides labor throughout season to seller
in exchange for water
Piece Rate- Buyer pays fee for each application throughoutseason
Output Share- One-time fee paid at end of season and
dependent on crop yield
Input Share- Seller provides inputs to buyer in exchange forlarger output share
Fixed Rent- One-time fee paid by seller at start of season for use
of land
Michler (Purdue) Contracts for Groundwater Irrigation 7/27 IRRI 2014 7 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
19/61
Types of Water Contracts
Fixed Charge- One-time fee paid by buyer at start of season for
water throughout season
Labor Charge- Buyer provides labor throughout season to seller
in exchange for water
Piece Rate- Buyer pays fee for each application throughoutseason
Output Share- One-time fee paid at end of season and
dependent on crop yield
Input Share- Seller provides inputs to buyer in exchange forlarger output share
Fixed Rent- One-time fee paid by seller at start of season for use
of land
Michler (Purdue) Contracts for Groundwater Irrigation 7/27 IRRI 2014 7 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
20/61
Types of Water Contracts
Fixed Charge- One-time fee paid by buyer at start of season for
water throughout season
Labor Charge- Buyer provides labor throughout season to seller
in exchange for water
Piece Rate- Buyer pays fee for each application throughoutseason
Output Share- One-time fee paid at end of season and
dependent on crop yield
Input Share- Seller provides inputs to buyer in exchange forlarger output share
Fixed Rent- One-time fee paid by seller at start of season for use
of land
Michler (Purdue) Contracts for Groundwater Irrigation 7/27 IRRI 2014 7 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
21/61
The Water Selling Agent:Cost and Signals
Cost function
c(a ) = (1/2)a a (1)
Sufficient water
Pr(y= 1|a ) = y a (2)
Crop output
x= x a + (3)
Michler (Purdue) Contracts for Groundwater Irrigation 8/27 IRRI 2014 8 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
22/61
The Water Selling Agent:Cost and Signals
Cost function
c(a ) = (1/2)a a (1)
Sufficient water
Pr(y= 1|a ) = y a (2)
Crop output
x= x a + (3)
Michler (Purdue) Contracts for Groundwater Irrigation 8/27 IRRI 2014 8 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
23/61
The Water Selling Agent:Cost and Signals
Cost function
c(a ) = (1/2)a a (1)
Sufficient water
Pr(y= 1|a ) = y a (2)
Crop output
x= x a + (3)
Michler (Purdue) Contracts for Groundwater Irrigation 8/27 IRRI 2014 8 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
24/61
The Water Selling Agent:Compensation Package
U= S
Fixe
dPaym
ent
+ y a
Rela
tionalC
ontract
+ x a
Enforceable
Contract
(1/2)a a
C
ost
(4)
Fixed charge = 0,= 0,S>0.
Piece rate0<
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
25/61
The Water Selling Agent:Compensation Package
U= S
Fixe
dPaym
ent
+ y a
Rela
tionalC
ontra
ct
+ x a
Enforceable
Contra
ct
(1/2)a a
C
ost
(4)
Fixed charge = 0,= 0,S>0.
Piece rate0<
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
26/61
The Water Selling Agent:Compensation Package
U= S
Fixe
dPay
men
t
+ y a
Rela
tionalC
ontra
ct
+ x a
Enforceable
Contra
ct
(1/2)a a
C
ost
(4)
Fixed charge = 0,= 0,S>0.
Piece rate0<
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
27/61
The Water Selling Agent:Compensation Package
U= S
Fixe
dPay
men
t
+ y a
Rela
tionalCon
tract
+ x a
Enforceable
Contra
ct
(1/2)a a
C
ost
(4)
Fixed charge = 0,= 0,S>0.
Piece rate0<
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
28/61
The Water Selling Agent:Agents Maximization Problem
Incentive Compatibility Constraint assumes agents maximization
problem is
maxa
U= S+ x a + y a (1/2)a a (5)
Maximized Utility
U
= S+ 1/2(
2
+ 2k +
2
) u0 (6)
Assume agents Participation Constraint satisfied with equality
Michler (Purdue) Contracts for Groundwater Irrigation 10/27IRRI 2014 10 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
29/61
The Water Selling Agent:Agents Maximization Problem
Incentive Compatibility Constraint assumes agents maximization
problem is
maxa
U= S+ x a + y a (1/2)a a (5)
Maximized Utility
U
= S+ 1/2(
2
+ 2k +
2
) u0 (6)
Assume agents Participation Constraint satisfied with equality
Michler (Purdue) Contracts for Groundwater Irrigation 10/27IRRI 2014 10 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
30/61
The Water Selling Agent:Agents Maximization Problem
Incentive Compatibility Constraint assumes agents maximization
problem is
maxa
U= S+ x a + y a (1/2)a a (5)
Maximized Utility
U
= S+ 1/2(
2
+ 2k +
2
) u0 (6)
Assume agents Participation Constraint satisfied with equality
Michler (Purdue) Contracts for Groundwater Irrigation 10/27IRRI 2014 10 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
31/61
The Water Selling Agent:The Value ofK
k= x y (7)
Geometrically,kis cosine of angle between x andy
By Cauchy-Schwarzk2 1
Economically,k is correlation between marginal effects ofa onx
andy
Michler (Purdue) Contracts for Groundwater Irrigation 11/27IRRI 2014 11 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
32/61
The Water Buying PrincipalPrincipals Maximization Problem
Maximization Problem
max(,)
V(, ) = (k+ ) 1/2(2 + 2k + 2) (8)
s.t. V(, ) r VEC 0
Self Enforcement Constraint
(9)
r- short term gain from defecting on Relational Contract VEC - value from defaulting to Enforceable Contract
Michler (Purdue) Contracts for Groundwater Irrigation 12/27IRRI 2014 12 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
33/61
The Water Buying PrincipalPrincipals Maximization Problem
Maximization Problem
max(,)
V(, ) = (k+ ) 1/2(2 + 2k + 2) (8)
s.t. V(, ) r VEC 0
Self Enforcement Constraint
(9)
r- short term gain from defecting on Relational Contract VEC - value from defaulting to Enforceable Contract
Michler (Purdue) Contracts for Groundwater Irrigation 12/27IRRI 2014 12 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
34/61
The Water Buying PrincipalPrincipals Maximization Problem
Maximization Problem
max(,)
V(, ) = (k+ ) 1/2(2 + 2k + 2) (8)
s.t. V(, ) r VEC 0
Self Enforcement Constraint
(9)
r- short term gain from defecting on Relational Contract VEC - value from defaulting to Enforceable Contract
Michler (Purdue) Contracts for Groundwater Irrigation 12/27IRRI 2014 12 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
35/61
Solutions
= rk/(1 k2) (10a)
= (1 k2 r)/(1 k2) (10b)
Relational Contract: = 0,= 0, = 1 Fixed charge Piece rate
Enforceable Contract: = 1,= k,= 0 Output share
Michler (Purdue) Contracts for Groundwater Irrigation 13/27IRRI 2014 13 / 27
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
36/61
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
37/61
Comparative Statics
1. Why do farmers choose to use a particular type of contract?
When discount rates (r) are low, RCs are more likely than ECs.
When performance signals (k) are inaccurate, RCs are morelikely than ECs.
2. What is the role of different types of governance in determining
contract choice?
Weak punishment/governance makes RCs more likely than ECs
Michler (Purdue) Contracts for Groundwater Irrigation 14/27IRRI 2014 14 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
38/61
Comparative Statics
1. Why do farmers choose to use a particular type of contract?
When discount rates (r) are low, RCs are more likely than ECs.
When performance signals (k) are inaccurate, RCs are morelikely than ECs.
2. What is the role of different types of governance in determining
contract choice?
Weak punishment/governance makes RCs more likely than ECs
Michler (Purdue) Contracts for Groundwater Irrigation 14/27IRRI 2014 14 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
39/61
Comparative Statics
1. Why do farmers choose to use a particular type of contract?
When discount rates (r) are low, RCs are more likely than ECs.
When performance signals (k) are inaccurate, RCs are morelikely than ECs.
2. What is the role of different types of governance in determining
contract choice?
Weak punishment/governance makes RCs more likely than ECs
Michler (Purdue) Contracts for Groundwater Irrigation 14/27IRRI 2014 14 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
40/61
Survey Data
Conducted with support from
U.S. Borlaug Fellowship, IRRI &
Bangladesh Ag. University
96 villages selected randomlyfrom 48Bororice growing
districts
10 households randomly
selected from each village Collected at end of Bororice
season (May - July) 2013
Michler (Purdue) Contracts for Groundwater Irrigation 15/27IRRI 2014 15 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
41/61
Personal Discount Rates
We use simple inter-temporal
choice experiment to elicitindividual interest rates
We convert to discount ratesfor regression
r= 11+i
Michler (Purdue) Contracts for Groundwater Irrigation 16/27IRRI 2014 16 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
42/61
Performance Signal
We use soil quality as ourperformance signal
k= Cov(x,y)Var(x)Var(y)
As soil quality , Var (y) andk
Michler (Purdue) Contracts for Groundwater Irrigation 17/27IRRI 2014 17 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
43/61
Third-Party Enforcement
Michler (Purdue) Contracts for Groundwater Irrigation 18/27IRRI 2014 18 / 27
Introduction Irrigation Contracts Data & Results Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
44/61
Punishment Types
Given third-party arbitration
exists, we observe three typesof punishment
Use indicators for each type,with no third-party arbitration
as base case
Michler (Purdue) Contracts for Groundwater Irrigation 19/27IRRI 2014 19 / 27
Introduction Irrigation Contracts Data & Results Conclusions
E i M d l
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
45/61
Econometric Model
Pr(RC = 1|X) = (0 + 1ri+ 2ki+ 3VEC
j + Zi1 + Wi2)
ri- discount rate
ki- performance signal
VECj - severity of village level punishment
Zi- vector of buyer characteristics
Wi- vector of well characteristics
We instrumentriwith distance between buyers and sellers house
Michler (Purdue) Contracts for Groundwater Irrigation 20/27IRRI 2014 20 / 27
Introduction Irrigation Contracts Data & Results Conclusions
E t i M d l
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
46/61
Econometric Model
Pr(RC = 1|X) = (0 + 1ri+ 2ki+ 3VEC
j + Zi1 + Wi2)
ri- discount rate
ki- performance signal
VECj - severity of village level punishment
Zi- vector of buyer characteristics
Wi- vector of well characteristics
We instrumentriwith distance between buyers and sellers house
Michler (Purdue) Contracts for Groundwater Irrigation 20/27IRRI 2014 20 / 27
Introduction Irrigation Contracts Data & Results Conclusions
D t i t f C t t Ch i
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
47/61
Determinants of Contract Choice
All Water Buyers
Base: Enforceable Contract LPM Probit IV
Discount Rate (r)
Discount Rate (0-12 months) 0.031 0.481 9.048
(0.113) (0.941) (5.182)
Performance Signal (k)Standard Soil Quality 0.028 0.322 0.455
(0.023) (0.230) (0.172)Good Soil Quality 0.001 0.638 0.722
(0.029) (0.258) (0.225)
Punishment (VEC )
Private Punishment 0.133 0.307 0.249(0.118) (0.719) (0.538)
Economic Punishment 0.074 0.702 0.505(0.038) (0.335) (0.373)
Social Punishment 0.155 1.485 1.244
(0.071) (0.321) (0.483)
Michler (Purdue) Contracts for Groundwater Irrigation 21/27IRRI 2014 21 / 27
Introduction Irrigation Contracts Data & Results Conclusions
Eff t f G b C t t T
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
48/61
Effect of Governance by Contract Type
Village Enforcement No Village Enforcement
Base: Fixed Charge Share Piece Rate Share Piece Rate
Discount Rate (r)
Discount Rate (0-12 months) 1.905 3.911 0.633 5.228
(3.308) (2.104) (3.799) (2.955)
Accuracy Signal (k)
Standard Soil Quality 0.868 0.282 1.029 0.179(0.500) (0.454) (0.866) (0.507)
Good Soil Quality 1.303 0.051 2.156 0.031(0.773) (0.646) (0.931) (0.439)
Punishment (VEC
)Economic Punishment 3.003 0.467
(1.533) (0.716)Economic Social 4.104 0.498
(1.534) (0.588)
Michler (Purdue) Contracts for Groundwater Irrigation 22/27IRRI 2014 22 / 27
Introduction Irrigation Contracts Data & Results Conclusions
Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
49/61
Conclusions
1. Why do farmers choose to use a particular type of contract?
High discount rate decreases probability of relational contracts.
Existence of an accurate performance signal decreases
probability of relational contracts.
2. What is the role of different types of governance in determining
contract choice?
Severe punishment of enforceable contracts decreases probability
of relational contracts.
Michler (Purdue) Contracts for Groundwater Irrigation 23/27IRRI 2014 23 / 27
Introduction Irrigation Contracts Data & Results Conclusions
Conclusions
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
50/61
Conclusions
1. Why do farmers choose to use a particular type of contract?
High discount rate decreases probability of relational contracts.
Existence of an accurate performance signal decreases
probability of relational contracts.
2. What is the role of different types of governance in determining
contract choice?
Severe punishment of enforceable contracts decreases probability
of relational contracts.
Michler (Purdue) Contracts for Groundwater Irrigation 23/27IRRI 2014 23 / 27
Introduction Irrigation Contracts Data & Results Conclusions
General Policy Implications
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
51/61
General Policy Implications
How do we design interventions or new market mechanisms to ensure
groundwater conservation while continuing largeBororice yields?
Adopt a systematic approach to analyzing the market Policies must consider the governance structure and institutional
framework
Attempts to strengthen governance may result in sub-optimal
outcomes
Michler (Purdue) Contracts for Groundwater Irrigation 24/27IRRI 2014 24 / 27
Introduction Irrigation Contracts Data & Results Conclusions
General Policy Implications
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
52/61
General Policy Implications
How do we design interventions or new market mechanisms to ensure
groundwater conservation while continuing largeBororice yields?
Adopt a systematic approach to analyzing the market
Policies must consider the governance structure and institutional
framework
Attempts to strengthen governance may result in sub-optimal
outcomes
Michler (Purdue) Contracts for Groundwater Irrigation 24/27IRRI 2014 24 / 27
Introduction Irrigation Contracts Data & Results Conclusions
General Policy Implications
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
53/61
General Policy Implications
How do we design interventions or new market mechanisms to ensure
groundwater conservation while continuing largeBororice yields?
Adopt a systematic approach to analyzing the market
Policies must consider the governance structure and institutional
framework
Attempts to strengthen governance may result in sub-optimal
outcomes
Michler (Purdue) Contracts for Groundwater Irrigation 24/27IRRI 2014 24 / 27
Introduction Irrigation Contracts Data & Results Conclusions
General Policy Implications
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
54/61
General Policy Implications
How do we design interventions or new market mechanisms to ensure
groundwater conservation while continuing largeBororice yields?
Adopt a systematic approach to analyzing the market
Policies must consider the governance structure and institutional
framework
Attempts to strengthen governance may result in sub-optimal
outcomes
Michler (Purdue) Contracts for Groundwater Irrigation 24/27IRRI 2014 24 / 27
Introduction Irrigation Contracts Data & Results Conclusions
Specific Policy Implications
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
55/61
Specific Policy Implications
If goal is to incentive households to conserve water...
Output share wastes water most but is good for credit constrained
buyers Fixed charge conserves water most but is bad for credit
constrained buyers
Piece rate balances these two issues
Michler (Purdue) Contracts for Groundwater Irrigation 25/27IRRI 2014 25 / 27
Introduction Irrigation Contracts Data & Results Conclusions
Specific Policy Implications
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
56/61
Specific Policy Implications
If goal is to incentive households to conserve water...
Output share wastes water most but is good for credit constrained
buyers Fixed charge conserves water most but is bad for credit
constrained buyers
Piece rate balances these two issues
Michler (Purdue) Contracts for Groundwater Irrigation 25/27IRRI 2014 25 / 27
Introduction Irrigation Contracts Data & Results Conclusions
Specific Policy Implications
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
57/61
Specific Policy Implications
If goal is to incentive households to conserve water...
Output share wastes water most but is good for credit constrained
buyers Fixed charge conserves water most but is bad for credit
constrained buyers
Piece rate balances these two issues
Michler (Purdue) Contracts for Groundwater Irrigation 25/27IRRI 2014 25 / 27
Introduction Irrigation Contracts Data & Results Conclusions
Questions Remain
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
58/61
Questions Remain
Does price of piece rate contract account for "true" price of water?
Village governance may be able to address the common pool
resource problem But, better governance makes piece rate less likely
How does one design productivity enhancing, water conserving,
incentive compatible contracts within a given governance structure?
Michler (Purdue) Contracts for Groundwater Irrigation 26/27IRRI 2014 26 / 27
Introduction Irrigation Contracts Data & Results Conclusions
Questions Remain
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
59/61
Questions Remain
Does price of piece rate contract account for "true" price of water?
Village governance may be able to address the common pool
resource problem But, better governance makes piece rate less likely
How does one design productivity enhancing, water conserving,
incentive compatible contracts within a given governance structure?
Michler (Purdue) Contracts for Groundwater Irrigation 26/27IRRI 2014 26 / 27
Introduction Irrigation Contracts Data & Results Conclusions
Questions Remain
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
60/61
Quest o s e a
Does price of piece rate contract account for "true" price of water?
Village governance may be able to address the common pool
resource problem But, better governance makes piece rate less likely
How does one design productivity enhancing, water conserving,
incentive compatible contracts within a given governance structure?
Michler (Purdue) Contracts for Groundwater Irrigation 26/27IRRI 2014 26 / 27
Introduction Irrigation Contracts Data & Results Conclusions
Thank You
8/10/2019 The Effects of Governance on Relational and Formal Contracts: Theory and Evidence from Groundwater Irrigation Markets by Mr. Jeffrey Michler
61/61
QUESTIONS? COMMENTS? SUGGESTIONS?
Michler (Purdue) Contracts for Groundwater Irrigation 27/27IRRI 2014 27 / 27