The name is absent

authors conclude that contracts are effective at increasing potato load quality over the
spot market alternative. Carriquiry and Babcock (2004) consider that, in fact, contracts
are the only way to induce a risk-averse grower to move away from producing a
commodity to producing a high-value product.

In a recent paper, Alexander, Goodhue and Rausser (2007) examine an unusual
dataset 14 tomato growers over 4 years to analyze the effect of incentive contracts on
behaviour. They find that the processor obtains higher quality tomatoes from
contracting than from spot purchases because growers respond to price incentives for
quality.

Although these contributions have provided empirical support for the prevalence of
incentive contracts to encourage growers to produce greater level of quality over the no
contract alternative, it can not be concluded that the processor is better off offering price
incentives than not contracting. In fact, Alexander, Goodhue and Rausser (2007) outline
that some of their results suggest that offering those incentive contracts does not
improve profits. Hence, there would be the possibility that the processor could be not
acting optimally, as well as the possibility that their analysis would be mistaken on the
basis of their methodology and data.

To identify the solution to this problem, the objective of this paper, we develop
theoretically two models of vertical relationships, the incentive contract and the spot
market, to implement in the food industry and inspired by previous studies (e.g.,
Stiglitz, 1974; Holmstrom, 1979; Shavell, 1979). These models analyze the efficiency
of each mechanism by maximizing the total joint certainty equivalent for all processors
and producers.

Most of the theoretical models examined in the previous literature suffer from
limitations. Although it is well known that agricultural production often presents a

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