| dc.description.abstract | Contract farming is a vital tool to connect farmer and industry. However, contracts
participation between tobacco farmers and tobacco leaf supplier (TLS) was still low even
though the benefit of the contract is enormous. The low participation was related to factors
that affect the contract, demographics, farm characteristic, and other related factors.
However, farmer participation on the contract was still low. Besides, contracts initially
became a tool to prevent market failure since it regulated how economic actors acted against
others causing transaction costs (TC) due to asymmetric information that made the contract
not function ideally. Therefore, this study attempts to (1) explain factors underlying farmer
decision to participate in contract farming (CF), (2) explain asymmetric information.
Respondents in this study were 100 respondents consisting of 50 tobacco contract farmers,
and 50 independent farmers. This study applied logistic regression analysis to analyze
factors affecting farmer participation in CF. Besides, the New Institutional Economy
approach was exerted to analyze asymmetric information on product transfer from farmer to
TLS. The results showed that factors that significantly influenced tobacco farmers' decisionmaking to participate in CF are farming experience, land size, risk aversion level (RAL), the
certainty of price, and source of capital. Asymmetric information caused adverse selection
and moral hazard. About 30% of farmers had sold products to other parties (other TLSs and
middleman), and 8% of farmers had applied pesticides that TLS prohibited. Contracts that
were not ideal due to asymmetric information must be re-enforced by using additional costs
called transaction costs, divided into three types, (1) search and information costs, (2) cost
to design, negotiate and conclude and (3) the monitor and contract enforcement costs.
Monitoring costs had the potential to absorb the most considerable portion compared to the
other types of transaction costs. The greater the asymmetric information generated, the
greater the transaction costs incurred. | en_US |
