The name is absent

ρ σ² =0.00001

1   5   10 15 20 25 30 35 40

n=m

In----♦ Incentive Contract Market

Figure 3. Comparing total certain equivalent with incentive contract and spot market

ρ σ² =0.0001

1   5   10 15 20 25 30 35 40

n=m

Observing the figure 3 we see the processors may be either better off or worse off
using the incentive contract compared to the spot market depending on the
characteristics of the relationship involved. As agency theory predicts, an increase in the
magnitude of grower´s risk premium increases the appealing of the incentive contract
while decreasing the appealing of the spot market, considering the total certain
equivalent (see figure 3).

In the first best world with risk-neutral agents and/or absence of uncertainty
( ρσ_s² =0), the incentive contract is rarely efficient, only when the number of operators is
reduced, nearly successive monopoly. However, in the second best world with risk-
averse growers, the spot market becomes less attractive due to the high risk premium
supported by the growers in this mechanism.

Then, as grower´s risk premium (i.e. risk aversion or output variance) increases,
relative preference for incentive contract is likely to increase over spot market. This
result is supported by other studies, for example Cheung (1969), Bardhan (1984) and
Parthasarthy and Prasad (1974).

Comparing the three figures, we can see cases in which the incentive contract
provides a smaller level of quality but a greater level of total certain equivalent than the

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