Vertical integration in West Africa's cotton industry: are parastatals a second best solution?

This article provides a framework to compare market outcomes among vertically integrated monopsonies in the cotton sector of West Africa and alternative, more competitive market structures. Based on a principal agent framework, in the presence of factor market constraints, as well as capital market failure, efficiently operated cotton parastatals increase sector welfare and efficiency by providing input credits. In equilibrium, outcomes with the principal agent model suggest growers receive the reservation income to participate in cotton production while the principal (cotton company) extracts the surplus above the reservation income. Competitive markets entail more equitable distribution of benefits than with parastatal vertical integration, but credit and factor market constraints can still persist. Promotion of a competitive market system will not support cotton productivity growth unless stakeholders pursue complementary programs to develop credit markets and research and extension institutions. In the presence of current market failures, parastatals may be a second-best solution.