overall chain performance. The model accounts for this. Optimal incentive system parameters under
CHAIN ownership structure may not be optimal from the perspective of the producer or the plant, but
they do maximize expected gains for the chain.
With the behavioral assumptions in this analysis, along with the assumptions that incentive
system parameters will be fixed over the entire planning horizon and that the manager will be honest in
applying the incentive system parameters she chooses under a particular incentive system design and
ownership structure, the incentive system parameters and the associated optimal Salmonella control
policies of the plant and the producers represent a Nash equilibrium. Given the other party’s optimal
response, neither the producer nor the manager can be made better off by deviating from his or her
optimal solution.
4. Model Parameters
Model parameters for this analysis are based on current conditions for hog finishing operations
in the Netherlands, with non-Salmonella control-related variable production costs, PC, of €90.90 per
hog and a base price, PH, of €115.00 per hog. Each producer is assumed to deliver 200 hogs per
month, but all analysis is done on a per-hog basis. If hogs are tested, blood samples are analyzed for
ten of the 200 hogs delivered. The cost of serological testing is €2.00 per sample, so the testing cost
for the entire group, TC, is €0.10 per hog. The farmer’s monthly discount factor, δ, is assumed to be
0.9967, which implies an annual discount rate of 4%. The farmer’s constant absolute risk aversion
level, λ, is set at 0.10, a level that implies a risk premium equal to between 4% and 6% of the expected
net gain for the entire chain from participation in the Salmonella control program.
The slaughter plant’s quality premium for participation in the Salmonella control program,
QPS, is €4.25 per hog processed. The exogenously determined threshold for the average
13