This paper takes poultry industry as an example, and divides the contract content under the mode of " leading enterprises + farmers” into explicit contract and implicit contract. " Explicit contract” refers to the content of the contract with legal force. If enterprises violate the content of " explicit contract”, it is regarded as " explicit default”. " Implicit contract” refers to the clause not specified in the contract, and it is difficult for external institutions to determine the liability for breach of contract through the content of the clause. " Implicit default” refers to the behavior that enterprises do not need to bear the responsibility for breach of contract because of the unclear terms through changing the tacit content between enterprises and peasant households. The results show that the stability of implicit contracts will be affected by market price risks and the degree of contract constraints of farmers. The higher the market price risk is, the more recessive breach of contract enterprises tend to be. At the same time, the higher the degree of contract restrictionis, the more vulnerable farmers are to recessive breach of contract by leading enterprises. This recessive breach of contract will reduce the welfare of farmers. This paper holds that, from the perspective of leading enterprises, the existence of implicit default of contract is beneficial. Under the impact of greater market risks, enterprises not only avoid assuming all risks, but also do not need to blatantly breach the explicit contract to cause breach of contract compensation, thus maintaining the written cooperative relationship with farmers. But for farmers, the instability of implicit contract makes the profit margin decrease and the income risk rise. Therefore, it is particularly important to pay attention to the stability of " implicit contract” under the impact of market risks, in order to effectively protect the welfare of farmers.
The Impact of Market Risks on Contract Stability：Based on the Perspective of Implicit Default of Leading Enterprises in Agricultural Industrialization
Journal of Finance and Economics Vol. 45, Issue 10, pp. 112 - 124 (2019) DOI:10.16538/j.cnki.jfe.2019.10.009
Cao H S, Ying R Y, Liu X Y. Market risk，contract dynamics and inclusive growth: Take broiler industry as an example[J]. Finance and Trade Research, 2018, (3): 40-54. (In Chinese)
Cao L Q, Zhou L Q. Supporting the leading firm: A view from information[J]. China Rural Survey, 2001, (5): 32-37. (In Chinese)
Cheng H W. Implicit contracts, specific investment and capital structure[J]. China Industrial Economy, 2004, (8): 105-111. (In Chinese)
Deng H T, Mi X W. Analysis of contract selection and contract continuity conditions under constraint: Economic interpretation of inner Mongolia Sefeiya group co., ltd. and farmers’ continuous contracting[J]. Management World, 2002, (12): 120-127. (In Chinese)
Guo X M, Liao Z J, Fu R. Comparison of three kinds of agricultural industrialization models driven by leading enterprises, intermediary organizations and cooperatives: Analysis from the perspective of institutional economics[J]. Chinese Rural Economy, 2007, (4): 40-47. (In Chinese)
Li L, Guo S N. Research on factors affecting contract stability in order agriculture[J]. Heilongjiang Science, 2017, (19): 6-7. (In Chinese)
Liu F Q. Incomplete contract and the barrier to performance: A case research on the farm produce for order[J]. Economic Research Journal, 2003, (4): 22-29. (In Chinese)
Liu F Q. Research on the nature and governance relationship of “company + farmers” model[J]. Social Science Front, 2009, (5): 45-50. (In Chinese)
Liu X Y, Zhou L. A review of specific investment and contract stability[J]. Journal of Agrotechnical Economics, 2019, (8): 68-78. (In Chinese)
Luo B L, Liu C X, Wu X L. Assets specificity, specialized production and the market risk of the peasant- household[J]. Issues in Agricultural Economy, 2008, (7): 10-15. (In Chinese)
Luo B L, Ou X M. Cooperation mechanism, transaction objects and system performance: The cooperation mode of “company + farmers” and its interpretation of “Wens’s model”[M]. Beijing: China Agricultural Press, 2010. (In Chinese)
Mi Y S, Dong L, Deng J Y. The endogenous equilibrium of complementary assets, bilateral dependence and factor contract: Theoretical construction and empirical evidence of Dongjin Company[J]. Chinese Rural Economy, 2013, (4): 12-27. (In Chinese)
Peng D. An anatomy of firm default under incomplete contract[J]. Journal of Wuhan University of Technology, 2004, (1): 99-102. (In Chinese)
Peng J F, Yang S. Farmers’ safe agricultural products production behavior choice from the perspective of symbiosis: An empirical analysis based on 407 farmers[J]. Chinese Rural Economy, 2011, (12): 68-78. (In Chinese)
Qian Z H. Saving transaction costs: The key to the success of agricultural industrialization management——A case study of Jiangsu Ruyi Group[J]. Chinese Rural Economy, 2000, (8): 62-65. (In Chinese)
Sheng X D. Contract dilemma and organizational evolution of order agriculture[J]. Chinese Rural Economy, 2007, (12): 35-39. (In Chinese)
Sun X, Zhang C. Cost composition and benefit distribution of agricultural products circulation in China: A case study based on Dalian vegetable circulation[J]. Issues in Agricultural Economy, 2008, (2): 39-48. (In Chinese)
Wan J Y. The quasi-vertical integration, the governance by relations and the performance of contracts: Taking the Wen’s model of agricultural industrialization as an example[J]. Management World, 2008, (12): 93-102. (In Chinese)
Wan J Y, Ou X M. Industry chain integration, specialized investment and cooperative residual distribution: an illustration from Wen’s model[J]. Chinese Rural Economy, 2010, (5): 28-41. (In Chinese)
Wang Y F, Huang Y, Tang S. The leading enterprise and farmers’ order compliance efficiency and its motivation: Survey data from 91 agricultural enterprises[J]. Issues in Agricultural Economy, 2014, (11): 16-24. (In Chinese)
Xu X, Hu Y Y, Han Y, Wang S N. Farmers’ cognition of market risk and agricultural products futures and its influencing factors: Based on questionnaire survey of 328 farmers in 5 provinces (cities)[J]. Chinese Rural Economy, 2010, (7): 47-55. (In Chinese)
Yang M H. Support for leading enterprises in agricultural industrialization: A general theoretical analysis framework[J]. Nanjing Journal of Social Sciences, 2009, (5): 7-43. (In Chinese)
Yang X F, Hu J L, Jiang Q G, Shi J M, Liu Y B, Liu C X. Research on the distribution mechanism of agricultural industrialization interests[J]. Issues in Agricultural Economy, 1998, (11): 35-37. (In Chinese)
Yi Z Z, Gao Y, Guo S Y, et al. Price risk assessment and empirical analysis of China’s pig market[J]. Issues in Agricultural Economy, 2012, (4): 22-29. (In Chinese)
Yin Y S, Gao Y X, Mi Z C. Investigation on the types and stability of commodity contracts between companies and farmers[J]. Chinese Rural Economy, 2003, (8): 63-67. (In Chinese)
Zhao X L, Wu D. Research on stability of commodity contract in agricultural industrialization management[J]. Contemporary Economic Research, 2005, (2): 70-72. (In Chinese)
Zhou L. Avian influenza and the transformation of China’s poultry[J]. Issues in Agricultural Economy, 2016, (3): 34-42. (In Chinese)
Zhou L Q, Cao L Q. Factor contract is superior to commodity contract[J]. Economic Research Journal, 2002, (1): 14-19. (In Chinese)
Zhou L Q, Deng H T. Why the “quasi-integration” contracts are selected? The evidences from the contracts signed by Sapphire company and farmers[J]. China Rural Survey, 2004, (3): 2-11. (In Chinese)
Barrett C B, Bachke M E, Bellemare M F, et al. Smallholder participation in contract farming: Comparative evidence from five countries[J]. World Development, 2012, 40(4): 715-730.
Klein B, Crawford R, Alchian A A. Vertical integration, appropriable rents, and the competitive contracting process[J]. Journal of Law and Economics, 1978, 21(2): 297-326.
Knoeber C R, Thurman W N. “Don’t count your chickens…”: Risk and risk shifting in the broiler industry[J]. American Journal of Agricultural Economics, 1995, 77(3): 486-496.
Martin L L. Production contracts, risk shifting, and relative performance payments in the pork industry[J]. Journal of Agricultural and Applied Economics, 1997, 29(4): 267-278.
Wang H H, Wang Y, Delgado M S. The transition to modern agriculture: Contract farming in developing economies[J]. American Journal of Agricultural Economics, 2014, 96(5): 1257-1271.
Williamson O E. The vertical integration of production: Market failure considerations[J]. American Economic Review, 1971, 61(2): 112-123.
Cite this article
Zhou Li, Long Ziyan. The Impact of Market Risks on Contract Stability：Based on the Perspective of Implicit Default of Leading Enterprises in Agricultural Industrialization[J]. Journal of Finance and Economics, 2019, 45(10): 112-124.