The name is absent

the fear of loss of contracting will prevent them from failing to take actions prescribed
by the contract (Otsuka, Chuma and Hayami, 1992).

With regard to the performance indicator, the grower´s contribution to revenue in
the downstream market will be chosen because it provides a more valuable signal
regarding the grower´s action than the input quality, which is imperfectly measured
(Holmstrom, 1979; Hueth and Ligon, 1999a). This performance measure is frequently
found in fresh fruits and vegetables (Hueth and Ligon, 2001). Then, the optimal contract
by processor i offered to grower k is:

(8) wik =αi+βikQikPik

Next, building on prior research by Holmstrom & Milgrom (1987) we model the
processor i´s behavior given the growers´ optimal response. The processor i chooses the
parameters of the linear contract, αik and βik, that maximizes her expected profit net of
growers´ compensation, CE_i^IC , subject to the constraints that each grower chooses his
efforts in quantity, x_ik , and quality, e_k , to maximize his expected utility, CE_k^IC ,
(incentive constraint) and that each grower attains with each contract at least his
reservation utility, U_i^m_kⁱⁿ (participation constraint). These constraints ensure individual
and incentive compatibility in form of a Nash equilibrium, where agents choose their
respective efforts levels individually and no cooperatively. Then, the maximization
problem for a representative processor i becomes

m

(9)    MaxCEi^IC=Ε∑(QikPik-wik)

αik , ^βik

Subject to

nn

⁽¹⁰⁾            MaxCE¹_k =^e∑∣ w_lk--xk^e2∣-∑k^σσWik

x, e^k                 l=1 <        ²        ) l=1 ²

(11)            εfw_lk - cx_αe²_kK ^Pσ2 ≥ Um^m         ∀ k = 1...m

lk lk k                w_lk        lk

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