PROTECTING CONTRACT GROWERS OF BROILER CHICKEN INDUSTRY

-i

utilized and x Given the output produced by all growers except i, the optimum compensation
rule for grower i can be approximated by a Taylor series expansion at x = x^-i which provides

rⁱ(.)=bo+βo( X^-i-Xⁱ )                                                                  (6)

where a grower is paid a base payment bo , to provide incentives to participate, adjusted by a
positive or negative amount that depends on his relative performance (x^-i-xⁱ ) and the magnitude
of the "piece rate" 0<β _o <1. The variable part provides incentives to exert effort. That’s the way
how common uncertainty is removed from the grower's responsibility.

Regulator’s case

Now, the question is what rule do we get when we look at equation (5),i.e., when we look
at the regulator’s problem? Only additional term that we have is the welfare weight ω. If we
rewrite (5), we have

1

U '( r (x ) =----------------------------------------------------------------------- Vx, i

( λ+ω )+μ [1 - ^hι∙^x ∙ e ,e      ∙H^ιgx    ^x ■•    e,e - ) ]

h(x^l / e = eH )g(x ⁱ / x^l, e = e_H )

—-           -                         - - —,—i i.i

Given the distribution and the preferences, for any realization of (x , x ), denominator of the

right hand side of (5) is higher that that of (5^,). That means right hand side is smaller in

regulator’s case. Hence, concavity of utility function gives us larger rⁱ(x) for the regulator’s case.
-                —               —             — l —i -v∙l

Since this happen for any realization of (x  , x ), the optimum compensation rule for grower i

can be approximated by a Taylor series expansion at x = (1+ψ (ω)) x^-i which provides
rⁱ(.)=bo+βo[(1+ψ(ω)) x -xi ]                                                     (6^,)

where ψ^,(ω) >0 . Now, for the feed realization of ( x ^-i, Xⁱ ) where x ^-i = X ,the bonus
payment is zero according to the existing rule adopted by the integrator. Whereas for the same
realization of feed use, the regulator’s contract gives bonus of β _o ψ (ω)xⁱ. This happens because
the regulator cares about the welfare of the growers. As a result, she gives part of the surplus to
the growers. But the question is how to implement the contract and where to set the value of the

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