testing costs not paid for by the producers. The plant also receives penalties assessed to producers.
Otherwise, the plant’s processing margin per hog is fixed.
The manager chooses a compensation/testing system, α, and plant level control package, γt, that
optimizes her relevant performance measure, subject to producers’ optimal behavior under the
incentive system and the participation constraint that the certainty equivalent of each producer’s
expected net gain from participation in the Salmonella control program must be greater than or equal to
zero. The manager’s relevant performance measure depends on the ownership structure for the
slaughter plant. We consider two structures: ownership by non-producer investors (IOF) and
ownership by a producer cooperative (COOP).
Under the IOF structure, the manager maximizes the plant’s expected gain from participation in
a Salmonella control program, which is defined as the expected premium received from downstream
customers plus expected penalties paid to the plant by producers minus plant control costs, producer
quality premiums and Salmonella testing costs paid by the plant. Under the COOP structure, the
manager maximizes the certainty equivalent of the representative producer’s net gain from
participation in the Salmonella control program subject to the constraint that the plant’s expected gain
from participation in the Salmonella control program is greater than or equal to zero.
We also consider the case where the manager chooses incentive system parameters to maximize
net gains from Salmonella control for the entire two segment chain (CHAIN). In this case, which
serves as an overall efficiency benchmark for chain operations with decentralized decision making, the
objective is to maximize the plant’s expected quality premium minus control and testing costs.
Penalties paid by producers to the slaughter plant are not considered explicitly in the function to be
maximized, since they are simply within-chain transfers between parties. Because these penalties are
stochastic and producers are risk averse, however, the incidence of penalties does indirectly affect
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