PROTECTING CONTRACT GROWERS OF BROILER CHICKEN INDUSTRY

Vukina showed, switching from a tournament to a fixed performance standard is not making
growers better off without further regulation. But the question is -is there any way to regulate the
existing contract which is welfare improving for the growers and implementable ? If we can find
any, then we don’t have to throw out the existing contract which is in place for the last half
century. This is the question that I want to address in this paper. The regulator solves the
integrator’s problem as a social surplus maximizer, and then designs the mechanism in such a
way that the integrator implements social surplus maximizing contract.

In case of the relative payment structure based on the tournaments regulator may be able
to increase the welfare of the growers regulating the average performance standard upward.If
there is budgetary constraint then the regulator may be restricted severely in doing so.The paper
is organized as follows. In the next section, I describe the model. The results are obtained and
discussed in section 3. In the fourth section, I try to solve the problem with budget constraint. In
the final section, I summarize the results.

2. The Model

Based on the earlier work of Tsoulouhas and Vukina, we model the contractual relationship
between a single integrator and a number of growers. They assume that each

grower receives the same number of chicks that he is supposed to raise to the same target weight.
Hence, the number of pounds produced is roughly the same for all growers and the performance
differs depending only on the feed used. The amount of feed utilized by a grower stochastically
depends on his own effort. By exerting effort, the grower can speed up the growth of animals
that will reach market weight by consuming less feed. The integrator cannot directly observe the
effort level of each grower, that is, there is "hidden action" moral hazard. The integrator can only
observe the feed used and the output obtained by each grower.

The sequence of moves is as follows. At the beginning, the integrator offers a take-it-
or-leave-it contract to each grower specifying a payment schedule. Depending on this pay

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