spot market (see for example, n=m<5 and ρσs2 =0.00001). Hence, it can be not
concluded that the governance mechanism that provides a greater level of quality is the
optimal mechanism considering the total certain equivalent.
Likewise, there are situations in which not only does the spot market provides a
greater level of quality, but also a greater total certain equivalent than the incentive
contract (for example in absence of uncertainty, ρσs2 =0). This result would suggest that
the spot market could be preferred over the incentive contract under several conditions.
Taken together, processors should choose the governance mechanism that
maximizes their wealth, not product yield or quality properties. The reason is that it can
be concluded that neither a greater level of quality always leads to a greater level of
total certain equivalent nor the incentive contract is always more efficient than the spot
market.
This simulation exercise could also provide a consistent explanation for some results
obtained by Alexander, Goodhue and Rausser (2007). They can not conclude that the
benefit of higher quality outweighs the costs of providing the price incentives for the
processor. Although the offer of these incentives by the processor might appear to be
prima facie evidence that the processor increases profits by offering price incentives for
quality, the results of their analysis do not completely support this inference.
Conclusions
The use of contracts to induce growers to provide desired quality attributes has
become common practice in many agricultural sectors. To solve the apparent
asymmetric information problems between processors and independent growers that
universally plague these relationships, the majority of contract use high-powered
incentives schemes to compensate growers (Curtis and McCluskey, 2003; Dubois and