Contracting for Terroir in Sake

Abstract

Over the last century, Japanese consumers have steadily lost their taste for sake. Several large producers dominate the mass market through economies of scale, but the regional brewers have gradually gone out of business. In this environment, a small group of enterprising regional brewers began to create a market for premium sake with the environmental variations so important to French terroir.To produce this terroir sake, brewers must convince local farmers to grow high-risk and high-cost varieties of rice optimized for premium sake. The challenge involves unusually complex incentive and informational requirements. Yet the parties almost never draft elaborate contracts with verifiable terms, and rarely vertically integrate. Instead, they build dense and refined networks of social capital among themselves and combine short-term renewable (and hence terminable) contracts, extremely high (efficiency-wage level) prices, and close monitoring by the brewer. In the process, they give the farmers strong incentives to let the brewers intervene as needed in the farming.The brewers and farmers neither draft elaborate contracts nor vertically integrate for a simple reason: they do not need to do so. The combination of dense networks of social capital, terminable short-term contracts, and high prices gives them all the flexibility they need.