Introduction. Costa Rica’s pepper production (Piper nigrum L.) is relatively low, but for the farmers involved it presents an interesting cash cropping activity. This paper aims to analyse whether contracts with processing firms offer an incentive for farmers to invest in pepper production and thereby increase their income. We analysed the characteristics of farmers with formal and informal contracts to see if this influences their way of producing pepper, their yields and income. The second goal of our work was to study whether market conditions (one or more buyers) influence contract uptake and pepper production. Materials and methods. A survey was conducted in 2000 among 63 farmers, 32 of whom had access to only one buyer and 31 of whom could sell to three potential purchasers. Characteristics of farmers, farms and pepper production were compared in terms of market conditions and forms of contract. A subsample of 24 farmers was revisited in 2008. Results. Overall, the effects of contracts in terms of improving access to inputs and increasing yield and productivity were limited. However, formal contracts were endorsed by income-constrained farmers, especially in the early phase of establishing themselves in the market. In subsequent phases, and under more competitive market conditions, producers seemed to prefer verbal commitments to formal contracts. In situations where a monopsony situation prevailed, there were lower yields. Conclusion. Contracts are important in the start-up phase, and competitive market conditions favour a process of moderate intensification which stimulates high returns at relatively low costs to the most established pepper producers.