How private contract enforcement mechanisms can succeed where public institutions fail: the case of Juhocukor a.s.

Abstract

The enforcement of contracts is necessary for efficient exchange and investment in economic activities. Contracts can be enforced through a variety of mechanisms, both public and private. However, in many developing and transitional countries these public institutions are either absent or ineffective in ensuring contract enforcement. Under such conditions, private enforcement mechanisms may provide a suitable replacement for public enforcement institutions. This may be done externally through a third party or internally through self-enforcing agreements. This paper analyzes the use of "self-enforcing" arrangements or "internal" private enforcement mechanisms. Using a case study of an agri-business in a transition economy -Juhocukor a.s., a Slovakian sugar processor -we show that the use of "internal" private contract enforcement mechanisms can have a significant positive effect on output and efficiency for both partners to the exchange transaction in an environment characterized by the absence or ineffectiveness of public enforcement institutions.

Commercialisation of goat production in South Africa

“…These demands have led to the increased occurrence of vertical integration in agricultural food and nonfood product markets (Sporleder, 1992;Martinez et al, 1997;Gow et al, 2000;Engelbart et al, 2001;SAMIC, 2002;Singh, 2002). A supply chain created through vertical integration can be defined as an integrated process through which a number of firms co-operate in an effort to acquire raw materials, process these materials into another form, and deliver these products to consumers (Bearnon, 1998;Rehber, 1998).…”

“…time-based contracts, etc.) (Sporleder, 1992;Gow et al, 2000) required in the process to get the product to the consumer. In this scenario, the goat resource is mainly in the hands of the non-commercialised farmer, thus contracts could ensure not only the critical mass required to enter the retail and international market place, but could also assist in "locking" the non-commercialised farmer into a formal industry.…”

“…The enforcement of contracts has often proved problematic in developing countries where the public law enforcement institutions are in disarray or in the process of formation (Gow et al, 2000). Although this is not necessarily the case in the South African situation with its sound legal system, public legal enforcement channels are expensive.…”

“…Although this is not necessarily the case in the South African situation with its sound legal system, public legal enforcement channels are expensive. Contracts and legal processes are also an unknown field for non-commercialised farmers, so private sanctions could be created to assist them in reducing the possibility that they could create a hold-up in the production and processing chain (Gow et al, 2000). Sanctions can include the termination or non-renewal of the relationship (or renewal of future contracts biased against the reneging party in terms of pricing or conditions), or damage done to the reputation of the party who caused the holdup (Gow et al, 2000).…”

“…Contracts and legal processes are also an unknown field for non-commercialised farmers, so private sanctions could be created to assist them in reducing the possibility that they could create a hold-up in the production and processing chain (Gow et al, 2000). Sanctions can include the termination or non-renewal of the relationship (or renewal of future contracts biased against the reneging party in terms of pricing or conditions), or damage done to the reputation of the party who caused the holdup (Gow et al, 2000). However, Gow et al (2000) describes several internal institutional innovations applied by a private company to increase contract compliance.…”