The name is absent

Alexander, Goodhue and Rausser, 2007), we also derive it formally from the optimizing
behaviour of processors and producers.

The paper is structured as follows. In the following section, we set up both
alternative models of governance choice (incentive contract and spot market) using this
generalized framework. We then carry out a simulation exercise to understand the
effects of governance mechanism under a wide variety of circumstances. The results of
this exercise are used to explain many governance choice related issues. In the final
section of this paper, the linkages between governance structures and agricultural policy
are discussed.

Models formulation

An important contractual choice question is: Do incentives for quality ensure
optimality? Agricultural activities are characterized by a substantial degree of
uncertainty frequently in the form of hazardous natural environment, price risk and
quality measurement errors (Hueth & Ligon, 1999a, b). In this context, the deterministic
profit maximization model is inappropriate and another model should be adopted. A
widely accepted framework for analyzing decisions making under risk, especially in
agriculture, is the mean-variance approach (e.g., Myers & Thomson, 1989; Chavas &
Holt, 1990; Pope & Just, 1991; Coyle, 1992; Andersson, 1995; Gaynor & Gertler, 1995;
Duvois & Vukina, 2004), which allows concepts of uncertainty and attitude towards
risk to enter the theoretical framework. To illustrate the proposed methodology, we
assume that both parties, growers and processors, maximize a constant absolute risk
aversion (CARA) utility function and the stochastic variables are normally distributed¹.
The grower and the processor’s behaviour

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