A Study On Supermarket-dominated Vertical Contractual Relationship In Safe Agrifood Market

The deepened reform of agricultural operating system, further development of marketization for agricultural products and related factors, and the expansion of the demand of safe agrifood in the recent years, have contributed to a remarkable change of vertical contractual relationship and structure of suppliers at the agrifood markets in various regions in China, with a strengthened trend of vertical coordination. Varying degrees of backward integration dominated by supermarkets is an important trend in this process. The choices of vertical contractual relationship that supermarkets make are affected by various factors in the mode of safe food production. Based on property and contract theory, this paper examines the background and situation of the cooperation between supermarkets and farmers or farmers’ cooperatives, and make an analysis of the choices of backward contractual relationship by supermarkets and their performance in controlling the product quality.Under the basic background of technological features, management status and contracting environment in the current operation of safe agrifood of supermarkets and farmers, the contractual relationship between supermarkets and famers is asymmetrical, supermarkets making fastidious selections of farmers. Backward coordination dominated by supermarkets is the common pattern of "Farming-Supermarket" Docking. In view of it, this paper makes the analysis using a simple model based on the framework of multi-task principal-agent theory in combination with incomplete contract theory, including the choices of contracts made by supermarkets and farms’cooperatives, and their factors and the performance. Generally, the pattern of ralational employment makes the best performance in controlling the quality. Relational outsourcing always performs better than spot outsourcing. However it is hard to make a clear comparison in performance between spot employment and spot outsourcing or relational outsourcing without considering a range of factors including the relational specificity of the partners in human and non-human capital, environment of market competition, risks exposed to farmers’cooperatives, and risk aversion of them.The research of this paper stresses the idea that the partners could improve the safety and quality of agrifood and correspondingly the total revenue with proper allocation of control rights to agricultural physical assets. Informal contracts and relational governance may work to stimulate the investments of human capital by farmers which play an essential but easily neglected role in enhancing the quality of agrifood. The conclusions of this paper help to rethink the outcomes of industrial and commercial capital flowing down to countryside, and may have useful policy implications.