industry with respect contract payment provision tied to the performance of other
growers.”(Federal Register,P.5935) which implies that policy makers are taking such concerns
seriously and moving forward to take necessary steps to protect contract growers. But the most
relevant question is -what policy suggestions do they have to protect growers? Perhaps, none. In
reality, public policy in this area needs sufficient guidance, which, in effect, requires extensive
research to be conducted on integrator practices. But whatever the policy suggestions are , they
might impose restrictions on the privately held transactions between the integrator and the
contract growers. Imposed restrictions or regulations of any type on the privately held transaction
may affect different parties differently, may be at the cost of the efficiency.
The closely related literature on franchising has generally been very critical of
government regulation, on the grounds that any regulation will interfere with the ability of
economic parties to negotiate efficient agreements (Beales and Muris; Brickley, Dark and
Weisbach). Lewin, on the other hand, advocates in favor of regulation to allow the
unionization of growers that would increase their bargaining power; she also favors the
regulation of contract duration.
In a recent paper, Tsoulouhas and Vukina (2001) look at the welfare effects of a widely
advocated regulatory measure restricting integrators from using tournaments replacing them with
the payment structure based on the fixed standard. They have shown that , absent any other rules,
the mandatory replacement of tournaments with fixed performance standards can decrease
grower income insurance without raising welfare. But income insurance and welfare can
simultaneously be increased provided that the slope of the bonus payment scheme, the so called
"piece rate," is also regulated. Moreover, the enforcement of fixed performance standards absent
any rules for the magnitude of the piece rate will result in an unambiguous reduction in social
surplus, but regulation accompanied by a rule determining the magnitude of the piece rate may or
may not reduce social surplus, depending on the technology and preferences.
From the grower’s perspective, even though the replacement of the tournaments by fixed
performance standard eliminates the group composition risk it adds common production risk
which is larger than group composition risk (Levy and Vukina). And ,also, as Tsoulouhas and