Contracting for Terroir in Sake

Abstract

Over the course of the last half century, Japanese consumers have steadily lost their taste for sake. A few large producers dominate the mass market through economies of scale, but the regional brewers have gradually gone out of business. In this environment, a small group of enterprising regional brewers began to create a market for premium sake with the environmental variations so important to French terroir.

To produce the delicate and subtle terroir sake, brewers must convince local farmers to grow the high-risk and high-cost varieties of rice optimized for premium sake. The challenge presents contractual problems with unusually complex incentive and informational requirements. I explore the arrangements by which brewers have addressed these problems. Some have decided to grow the rice themselves -- "solving" the contractual problem through vertical integration. Others have constructed deceptively simple arrangements that elicit the requisite information, bind the firm to the community through social capital, and (by paying a sufficiently high price) give the brewer the right to intervene directly in the farming.

Keywords: Agriculture, wine, social capital, contracts

JEL Classification: K12, K20, L24, L66