Welcome to this module about “Coordination in the Agri-Food Value Chain". My name is “Carlo Russo” and I am an Associate Rofessor in Agricultural Economics at the Department of Economics and Law at the University of Cassino and Lazio Meridionale. This module is divided into “3 lessons”. In the first lesson, we introduce the topic of Coordination In the second lesson, we define contracts and learn about their importance in the agri-food value chain. In this lesson, we consider the Incentive Problem and discuss how to use contracts to address it. Finally, in the third lesson we cover a basic example of contract to illustrate the incentive problem at work. Here is a more detailed roadmap of this module. Lesson 1 is about coordination. We start from the definition of coordination. We discuss the importance of coordination and the reason why we address this topic in ths program. Then, we state what economists mean by ‘efficient coordination’. You might be familiar with the saying: "If you want something done, do it yourself", which is the exact opposite of coordination. Popular wisdom suggests that coordination is not always efficient or profitable. Here, we find out when we can say “Union makes strength” instead. In agri-food value chains very often coordination is the key to achieve results that would be impossible to achieve for a single firm. We provide a formal definition of such conditions. There are many ways to coordinate activities in the agri-food system. We cover a brief overview of the many forms of coordination and we discuss the implications for the organization of agri-food businesses. This concludes Lesson 1. In Lesson 2 we cover a specific form of coordination: Contracts. After a brief discussion of the general principles, we focus on contract design, which is the action of writing a contract leading to efficient coordination. We use the simplest approach to the task, called the principal-agent model. We use it to discuss a very important issue in coordination: the Incentive Problem. In Lesson 3, we discuss a simple example from the agro-food sector: the sharecropping contract. We use this example to apply the general notions that we learned in Lessons 1 and 2. After completing Lesson 3, we are ready to move on to Module 12 and talk about coordination in modern retail. This lecture requires a basic understanding of essential economic notions such as “market”, “transaction”, “efficiency”. The knowledge of any undergraduate intermediate microeconomic class is sufficient. After completing Lesson 1, you will achieve three key learning objectives: You will understand and will be able to explain what coordination is. You will be able to identify the conditions for profitable, namely efficient, coordination You will understand the coordination continuum. Let’s start with the first topic of Lesson 1: what is coordination? And why is it so important in agri-food value chains? Let’s start from the word ‘coordination’. It comes from Latin, the language of the Ancient Romans. It contains the prefix “co” which means “together, with many people” (the word “company” has the same root). Then there is the word “ordo” which means “order, ranking, but also “organization”. Then there is the suffix “ation” which derives from “actio” that means “action”. We can say that Coordination is the action of ordering, organizing people. The Latin origin of coordination is reflected in its meaning nowadays. The Cambridge dictionary defines coordination as “The act of making all people involved in a plan or activity work together in an organized way”. The definition has several interesting components. The most obvious one is that coordination involves a group of people. It concerns the way independent people or firms interact with each other. The agents are involved in a plan. This means that they share a common objective. Something that can be achieved through a joint effort. The agents must work together to obtain the result they want. Note that the agents must work together but they are independent. They may have different motivation and purposes for working together. We will come back to this important condition in Lesson 2 of this module. Coordination concerns economists because such joint efforts of independent people must be organized, namely efficient. Among all possible ways to organize the joint effort, we want to find out the most efficient one. Why is coordination so important in the Agri-food Values Chains? Coordination is a key topic in the AFVC. You studied already in the previous lectures how important quality, safety, health or environmental responsibility in the modern food system are. But how can a firm, in practice, deliver such attributes to the consumers? Producing such attributes it’ is so complex that almost no firm can do it on its own. Except for short supply chains, where farmers sell their own product to consumers directly, the vast majority of the food system is organized in long marketing channels based on the joint efforts of many firms: from producers to processors and retailers. The complexity in the Agri-food Value Chains is driven by consumer demand for attributes, as you studied in Module 2. Consumers require many attributes from their food making food production a very complex business. They require taste, safety, health, convenience, identity, social and environmental responsibility, just to name but a few attributes. Putting so many attributes in a product is a task that few firms can perform all alone. Furthermore, regulation aiming at preserving the general interest often leads to more complexity. The size of the food market and the scale of production are other important drivers of coordination. Providing food for millions of people is a great effort that requires the cooperation of many producers, retailers and service firms. Large-scale food production is extremely capital intensive. The goal of servicing a global food market is achieved by efficient coordination of many firms. Specialization and resource sharing are key drivers of success in the food system, and they postulate coordination. The third reason why coordination is so important is because … we are getting good at it. The progress of management and organization sciences makes coordination easier and more effective. For example, advancements in Logistics and in Contract theory deeply shape the new trends in the Agri-Food Value Chains. Complexity, Size and Knowledge are major trends in the Agri-Food Value Chains, and they all call for coordination. It is easy to see why it is a key issue in this field.
