Abstract
Contract enforcement is acknowledged as a major issue in Law and in Economics. Contrasting substitution and complementary perspectives with respect to the role of private vs. public enforcement institutions, this article analyses how contract law can support private institutions, and enhance economic efficiency. With multilateral agreements at stake, self-regulation and reputation mechanisms at the core of private ordering have limitations that collective organizations backed by the Law help to overcome. The analysis is substantiated by empirical data from the cattle industry. Our results suggest the need for a broader approach to contract regulation by legal scholars and antitrust-authorities.
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Notes
The delineation of “private” and “public” institutions remains controversial in the literature. In what follows we adopt the distinction proposed by Greif (2005), with public institutions relying on order and sanctions imposed by the state while private institutions are defined and implemented by economic agents themselves.
In his analysis of the private enforcement mechanisms and rules designed by the Chicago Board of Trade, Pirrong (1995) shows that the implementation of new rules that would increase the volume of transactions required legal intervention of the state to impose them, since some participants were loosing part of their bargaining power and their profits because of better delineated property rights and more transparency of transactions.
Referring to the example of cooperatives, Hendrikse (2004) provides interesting elements in that perspective.
There is usually a trade-off in that farmers have to accept restrictions, such as following technical rules and requirements defined by the group, committing to an “exclusivity rule” by delivering all their production for a specific product, and even delegating price determination to the group. At the same time, the “intra-professional” organization can take advantage of partial “territorial exclusivity” in representing farmers, thus guaranteeing a minimum level of activity to its members while increasing bargaining power through collective action and reducing destructive competition although, as a group, it remains actor in a very competitive market.
Recently, several French farmer unions in this sector have been sued for having been suspected of coordinating in order to influence upward prices paid to breeders during the BSE crisis of 2001 (see the decision of the European Commission of April 2, 2003 nr C (2003) 1065, regarding possible collusion on prices in the beef industry; and the judicial decision of December 13, 2006 (cases T-217/03 and T-245/03: European Commission vs. several farmers’ unions), by the first level Court of Appeal of the European Community). There is no evidence that the interprofession was involved in such practices.
Production contracts are agreements between an integrator company and farmers binding the later with specific production practices. They usually have two main components: (a) allocating responsibilities for the provision of inputs, and (b) determining rules of compensation for the farmers. Typically farmers provide land, buildings, utilities and labor while companies provide animals, food, medication, and even services of extra laborers. The legal term used in France for ‘production contracts’ is “contrats d’intégration”.
In France, this legal framework was implemented through several laws, particularly: Law nr. 60-808 of April 08, 1960, on standard contracts (“contrats-types”); Law of August 08, 1962, on collective organizations and producer groups; Law nr. 64-678 of July 06, 1964, on “integration” contracts and “campaign” contracts; and Law nr. 75-600 of July 10, 1975, providing support to “interprofessional” associations in agriculture.
This sharply contrasts predictions from agency theory which focuses on the optimal design of individual incentives contracts. One possible interpretation is that gains over negotiation costs from standardized contracts by far exceed losses of incentive intensity from individually tailored contracts (Allen and Lueck 2002).
This possibility creates problems in delineating the perimeter of each organization. For example, can organic producers involved in multi-product activities be organized in one single representative interprofessional association?
This function became particularly significant after the BSE crisis since the interprofession took a very active role in managing public relations, collecting scientific information and communicating with consumers.
Dramatic changes in R&D funding of French agriculture since 2002 have largely diffused the adoption of interprofessions, although most recent organizations are not involved in contract enforcement. An example of a R&D project is the design and implementation of an automatic grading system for beef carcasses, with the expectations of a more objective measurement than that from employees of slaughtering firms.
A 1977 decree, later modified and integrated in a European regulation adopted on August 12, 1981, defined dressing and weighting rules for carcasses. However, the existence of this standard mainly introduced for facilitating the implementation of a statistical system for regulating markets accordingly to rules of the Common Agricultural Policy (CAP) does not mean its effective use as a contracting clause. From a legal point of view, slaughterhouses remain fully responsible for grading carcasses. It must be reminded that slaughterhouses are private properties, to which access can be restricted.
In France, Direction Générale de la Consommation, de la Concurrence et de la Répression des Fraudes (DGCCRF).
In 1994, a complete physical blockade of the main slaughtering firms located in the Loire valley was implemented by coordinated groups of farmers. It was stopped 3 weeks later, after the accidental death of an employee of one of the slaughtering firms.
It is easier for cattle breeders to use blockade than for producers of more perishable goods like, say, tomatoes. Indeed, cattle breeders are less time constrained, with marginal loss in animals’ quality and marginal costs feeding them if they deliver animals later on.
Other approaches may be relevant here, e.g., political science or sociology.
Data from 2000. See Libecap (1992) for an analysis of the determinants of a similar evolution in the US.
The French cattle market is mainly organized through intermediaries: transactions are processed by producers’ groups (32%), private middlemen (34%), or directly by slaughtering firms (15%), the remaining 19% being traded on traditional livestock markets. Less than 3% of transactions are done on markets through auctions.
Actually a tax, imposed by the Law, is defined and collected by the interprofessional organisation at the national level. The tax was equal to 21 Euros/TEC in 2009, to be shared between farmers, slaughtering firms and retailers. The annual budget of the national interprofession in the cattle industry is around 35 million Euros, with 35% of this budget redistributed to the Local Interprofessional Committee (LIC).
Barriers to entry if they are tight enough may help keeping the coalition stable and facilitate enforcement (Bernstein 1992; Clay 1997; Richman 2005). However, they need also to be porous enough to allow the gradual expansion of the coalition over time, which is a condition for capturing gains from a better matching of agents to market opportunities (Clay 1997). Moreover, they often confront competition policies.
In the case of quality certifications in the food sector, the level of quasi-rents generated by differentiation strategies might be high enough to cover added administrative costs generated by such interprofessional organization. This reduces the expected benefits from embedding the arrangement in the Law of 1975 on interprofessional organization and from complying with the restrictive rules regarding membership and representation that it imposes.
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Mazé, A., Ménard, C. Private ordering, collective action, and the self-enforcing range of contracts. Eur J Law Econ 29, 131–153 (2010). https://doi.org/10.1007/s10657-009-9114-x
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DOI: https://doi.org/10.1007/s10657-009-9114-x
Keywords
- Contract law
- Private enforcement
- Transaction costs
- Self-regulation
- Coalitions
- Cartels
- Collective organization