Quality management and contractual incompleteness: grape procurement for high-end wines in Argentina

Abstract

Sourcing grapes from independent growers for use in top quality wines sold on the international market is a major organisational challenge for corporate wineries. Our paper adds to the small collection of existing literature addressing these coordination issues in the New World wine sector, by going deeper into the specifics of the contracts. Based on a case-study carried out in the Argentine province of Mendoza, this article presents an in-depth analysis of the technical process, in order to identify the contractual hazards posed by asset specificity, measurement costs, and non-contractible actions. Expanding Transaction Cost Economics to include contract completion and plural governance literature, this paper analyses the contractual and non-contractual mechanisms (price incentives, grower monitoring, allocation of decision rights to the winery, role of backward integration) used to govern such grape transactions. Through our analysis, we were able to arrive at four main conclusions. Firstly, most agreements are still verbal, with the exception of occasional written contracts, whose scope only encompasses minor legal points. It became clear to us that formal, rigid agreements are not always adequate in managing the inherently complex interactions between grape varieties, soil, farming practices and winemaking processes in high-end wine production. Secondly, extensive decision rights are allocated to wineries, to deal with incompleteness. These are key decisions to be taken during the cropping and harvesting process. Thirdly, pricing is generally kept flexible, with grape prices negotiated ex-post. This means that trade imbalances tend to be resolved in the long term. Winegrowers also benefit from financial rewards to compensate for the allocation of authority. Finally, any potential opportunistic behaviour by wineries with regard to asset specificity (in particular yield limitation) and allocation of rights is kept at bay by mechanisms such as winery reputations and credit third-party guarantee. This type of opportunistic behaviour by growers is similarly deterred through monitoring and vineyard ownership on the part of the wineries.