Cotton institutions and perverse incentives for fertilizer traders with the licensing system in Benin

Abstract

Agricultural development in Benin is constrained by low productivity mainly due to low use of mineral fertilizers and improved seeds. After more than two decades of the cotton state company’s monopoly, a market liberalization program is being implemented since the 1990s but still fail to meet farmers’ needs for quality fertilizers and efficient supply-chain services. This paper discusses Benin’s state-controlled licensing system, which forms the market liberalization program’s institutional basis. Empirical evidence is given of the relationships between the theory of institutions and transaction costs, and its application in the fertilizer supply chain management. In Benin, the licensing system particularly illustrates a case of institutional failure, where distorted rules of the game and collusion between traders and market regulation institutions in the play of the game provided perverse incentives to private oligopolies in the liberalized market. Indeed, the distortions were beneficial for the trade alliances which were in a position to largely influence the setting and application of the rules, thereby discouraging other traders to compete with better fertilizer quality and marketing service delivery. Tests on operations management, competition and entrepreneurship were performed to demonstrate that competition is lacking, and that in this condition other traders cannot create value in the cotton-oriented fertilizer supply-chain and promote a liberalized entrepreneurial economy.