Controlling opportunism in the wine industry: the role of contract monitoring and contract incentives

Abstract

ABSTRACTThe winery/grower relationship is one of the most critical in the industry and is often controlled by contracts, either verbal agreements or formal documents. Yet contracts are subject to opportunism and are said to be ‘incomplete’ due to bounded rationality. While monitoring efforts and contract incentives help mitigate opportunism, contracts need an enforceable and efficient legal systems to be effective. We survey 111 South African wineries to investigate why contracts are still widely used to coordinate grape supply relationships while these exchanges are likely to be characterised by high asset specificity and high uncertainty. We ask the question how Agency monitoring and incentives efforts are related to contract use in the South African wine industry, a country with a relatively weak legal system as defined by the World Bank. Employing multiple regression, we found that South African wineries tended to rely more on outcome based contracts, utilising ‘incentives’ rather than ‘monitoring’ to control their grape supply partners. Indeed, we also argue that trust is a substitute for monitoring efforts. We also found moderate support for trust and the legal system promoting the use of spot markets. These results provide some insights into how to structure grape supply contracts.