IOSR Journal of Business and Management (IOSR-JBM) e-ISSN: 2278-487X, p-ISSN: 2319-7668. Volume 19, Issue 1. Ver. V (Jan. 2017), PP 79-89 www.iosrjournals.org DOI: 10.9790/487X-1901057989 www.iosrjournals.org 79 | Page The Role and Importance of the Transactions Costs Theory in Agricultural Contracting Area: an Appraisal of Selected Empirical Studies Norsida binti Man 1 , Zuhal Rdhaiwi Kadhim 2 , Ismail b Abd Latif 3 , and Kelly Wong Kai Seng 4 1 Associate Professor (Ph.D.), Department of Agribusiness and Bio resources Economic, Faculty of Agriculture, Universiti Putra Malaysia, 43400 UPM Serdang, Selangor, Malaysia. Phone: +6012-3993872 E-mail: norupi45@yahoo.com 2 Corresponding Author, Graduate Research Fellow, Department of Agribusiness and Bio resources Economic, Faculty of Agriculture, Universiti Putra Malaysia, 43400 UPM Serdang, Selangor, Malaysia, lecturer in Baghdad University, Agriculture College. Phone: +6018-3939807 E-mail: Zuhal_khadim@yahoo.com 3 Assistance professor (Ph.D.), Department of Agribusiness and Bio resources Economic, Faculty of Agriculture, Universiti Putra Malaysia, 43400 UPM Serdang, Selangor, Malaysia. Phone: +603-8947 4902 E-mail: ial@upm.edu.my 4 Senior Lecturer (Ph.D.), Department of Agribusiness and Bio resources Economic, Faculty of Agriculture, Universiti Putra Malaysia, 43400 UPM Serdang, Selangor, Malaysia. Phone: +603-89474904 E-mail: kellywong@upm.edu.my Abstract: Formal contractual arrangements cover a considerable share of globe agricultural production. Agricultural contracts can have many beneficial effects. They can help farmers manage price and production risks, thus encouraging more efficient use of farm and processing capacities. But contracts can also have less benign effects. They can introduce new and unexpected risks for farmers—in some circumstances, they can extend a buyer’s market power— and they can effect fundamental changes in how farming is organized and carried out. In this our article we address transaction cost theory (TCT) in some details as a theoretical framework in study of methodology of agreements and contracts, for proving the role and importance of this theory on agriculture contracting area based on eight empirical studies on assessing transaction costs in different farms. Main finding is there are diverse opinions on the applicability of the transaction costs theory in agricultural contracting scope of different management decision-making processes. These opinions developed over a long period of time following continuous improvement on the application of the theory in solving of the outsourcing business problems. These studies also proved that transaction costs are difficult to measure and there is no standard procedure to assess transaction costs, but they can and should be estimated because they are important cost elements in the decision-making process concerning the choice of contract for different outsourcing agricultural production stages. Keywords: Agricultural contracts; spot markets; transaction cost theory; governance structures; contracts matrix. I. Introduction Formal contractual arrangements cover a considerable share of globe agricultural production. Contracting is associated with other features of ongoing structural change in agriculture, including shifts of production to larger farms, increased farm specialization, and greater product differentiation (Key, 2004). Many farm product transactions are organized through agreements between farmers and buyers that are reached prior to harvest (or before the completion of a production stage, as in the case of livestock) and that govern the terms under which products are transferred from the farm (U.S. Department of Agriculture, 2010). Contracts provide for much closer linkages between farmers and specific buyers than spot markets and may provide the contractor/buyer with greater control of agricultural production decisions. Specific contractual designs in agriculture vary, but we find that a simple two-way classification is informative (Macdonald, 2011): 1. Production contracts specify services provided by a farmer for a contractor who owns the commodity while it is being produced. The contract covers: the services provided by the farmer, the manner in which the farmer is to be compensated for the services, and the specific contractor responsibilities for provision of inputs. For example, farmers provide labor, housing, and equipment under livestock and poultry production contracts, while contractors provide such other inputs as feed, veterinary and livestock transportation services, and young animals. The farmer’s payment resembles a fee paid for the specific services provided by the farmer, instead of