The name is absent

Vukina, 2004; Alexander Goodhue and Rausser, 2007). While economists have shown
increased interest in the effects on quality of these contracts, surprisingly little attention
has been paid to the question whether processors are acting optimally.

To fill this gap, we have developed and applied a model of contractual choice in
agriculture by analysing the optimality of the incentive contract and the spot market in
the framework of a generalized moral hazard model, considering the quantity-quality
trade-off and competition.

Specifically, there is a trade-off between yield and quality of many agrarian inputs;
higher quality comes at the cost of lower yields and vice versa. Likewise, market prices
are higher for high-quality than for lower quality products, but exact price levels are
determined by market factors such as the relative supply for each good. Thus, prices and
yields appear to be inversely related in the aggregated market. However, the literature
on contractual choice has long dealt separately with quality and yield probably because
they are inaccessible to solve analytically.

Our analysis illustrates the effects of the incentive contract and spot market on
product properties, quality and quantity, on the basis of a simulation exercise. In
particular, we analyzed a plausible range of number of operators (growers and
processors) and risk premium and carried out a simulation exercise to understand the
effects of each mechanism under a wide variety of circumstances.

The exercise throws some light on the relative importance of analysing the
quantity/quality trade-off and competition in the analysis of the optimality in
governance choice. We can not conclude from our results that the mechanism that
provides a greater level of quality is the most efficient mechanism. Likewise, we can not
conclude that the processor is always better off offering incentive contracts than trading
in the spot market.

<<   16   17   18   19   20   21   22   >>

More intriguing information