CROSS-COMMODITY PERSPECTIVE ON CONTRACTING: EVIDENCE FROM MISSISSIPPI

Cross-Commodity Perspective on Contracting: Evidenc e from Mississippi

(Slater and Spencer; Williamson, 2000), there has been empirical support for the hyp otheses
generated from transactions cost theory (see, e.g., Lieberman; Joskow; Hobbs; Levy). De-
spite the evidence found in general markets, little examination of agricultural markets has
been conducted, and those studies in agriculture are in a commodity-specific context, which
limits generalization of findings to other commodities.

2.1  Transactions Cost

Williamson (1996) provides a description that is useful in understanding the contracting
decision. Assume there are two potentially different profit functions:

¼ⁱ  =  R(X) — C (X; k; ®) — °k — Gi; and

¼^m = R(X) — C (X;k; ®) — °k — Gm

where ¼ⁱ is the profit associated with contract type i, ¼^m is the profit associated with spot
sales, R(X) is the revenue associated with selling a given output X, C (X; k; ®) is a twice
differentiable, concave cost function, k is the degree of asset specificity¹ with a per unit cost
of °, G_i and G_m are the governance costs² associated with contract type i and spot sales,
respectively, and ® is a shift parameter. It is assumed that C_X > 0, C_k < 0, and C_{X k} < 0.
¹ Asset specificity is defined as the magnitu de of economic costs associated with redeploying an asset to its
best alternative use, and by its best alternative user (Williamson, 1979; Klein, Crawford and Alchain). Two
key concepts associated with asset specificity are quasi-rents and the ”hold-up” problem.  A quasi-rent is

the difference between the best alternative return on the capital before it is invested and the return it must
receive to prevent alternative use after the capital has been invested (Hennessy and Lawrence). The hold-up
problem arises when the buyer of the product attempts to appropriate the rents from the seller by forcing
disadvantageous contractual terms on the seller.  The buyer has this leverage over the seller because the

seller has invested in specific assets that are costly to redeploy.

² Governance costs can be any number of items related to managing a relationship.  Examples may be

searching out buyers, negotiation contracts, monitoring and enforcement of contracts, etc.

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