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Tournaments, Fairness, and Risk
- American Journal of Agricultural Economics
"... We estimate willingness to pay (WTP) to operate under two types of contracts—tournaments (Ts) and fixed performance-standard contracts (F). Our results are consistent with the notion that subjects having social preferences for fairness and care about risk. That is, when subjects experience greater i ..."
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We estimate willingness to pay (WTP) to operate under two types of contracts—tournaments (Ts) and fixed performance-standard contracts (F). Our results are consistent with the notion that subjects having social preferences for fairness and care about risk. That is, when subjects experience greater inequity under tournaments relative to fixed performance contracts, or experience greater revenue risk under tournaments, the gap between WTP for fixed performance and tournament contracts increases, ceteris paribus. Our results provide an explanation for grower dissatisfaction with tournament com-pensation schemes independent of possible concerns regarding opportunistic behavior by integrators. Key words: contract regulation, experiments, fairness, social preferences, tournaments. Relative performance contracts, which reward agents based on performance relative to other agents, can be beneficial to growers in the presence of large common shocks. For ex-ample, suppose that bad weather simultane-ously reduces the output of all growers in a region. If grower compensation is deter-mined by relative performance rather than absolute performance contracts, then grow-ers are largely insulated from the common shock. In contrast, if the same growers op-erate under fixed performance-standard con-tracts (F), then the growers bear the full brunt of the common shock because it becomes more difficult for them to meet the absolute performance standards. Relative performance schemes also have other desirable characteris-tics which can make them efficient and welfare enhancing in environments with large common shocks (Hueth and Ligon 2001; Knoeber and Thurman 1989). Though relative performance contracts are a legitimate incentive and risk management device, some farmers vociferously oppose Steven Wu is assistant professor and Brian Roe is associate pro-
Agribusiness economics and management
- American Journal of Agricultural Economics, Urbana
, 2010
"... Agribusiness scholarship emphasizes an integrated view of the food system that extends from research and input supply through production, processing, and distribution to retail outlets and the consumer. This article traces development of agribusiness scholarship over the past century by describing ..."
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Agribusiness scholarship emphasizes an integrated view of the food system that extends from research and input supply through production, processing, and distribution to retail outlets and the consumer. This article traces development of agribusiness scholarship over the past century by describing nine significant areas of contribution by our profession:(1) economics of cooperative marketing and management, (2) design and development of credit market institutions, (3) organizational design, (4) market structure and performance analysis, (5) supply chain management and design, (6) optimization of operational efficiency, (7) development of data and analysis for financial management, (8) strategic management, and (9) agribusiness education.
On the co-existence of spot and contract markets: An analysis of quality
"... document for non-commercial purposes by any means, provided than this copyright notice appears on all such copies. The food sector is undergoing a fundamental transformation in response to changing consumer demand that is the shift away from the agricultural commodities with standard quality specifi ..."
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document for non-commercial purposes by any means, provided than this copyright notice appears on all such copies. The food sector is undergoing a fundamental transformation in response to changing consumer demand that is the shift away from the agricultural commodities with standard quality specifications to agricultural ingredients with non-standard specifications. Consequently, there is an increasing concern about acquiring quality inputs among processors. The use of contracts to respond to this increasing demand for quality among consumers has become common practice in many agricultural sectors (Cook and Chaddad, 2000). To solve the apparent quality measurement problems between processors and independent growers that universally plague these relationships, the majority of contracts use incentives schemes to incentive growers to produce quality. In fact, many studies of incentive contracts have empirical support for the prevalence of incentive contracts to encourage growers to produce greater level of quality over the spot market. Among the existing studies, Curtis and McCluskey (2003)
An Empirical Examination of Relative Performance Evaluation Incentives, Capital Investment Strategy, and CEO Risk Taking
, 2010
"... This paper is based on my dissertation at the University of Wisconsin-Madison. I gratefully ..."
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This paper is based on my dissertation at the University of Wisconsin-Madison. I gratefully
The yield/quality trade-off and contractual choice
"... document for non-commercial purposes by any means, provided than this copyright notice appears on all such copies. With the constant pressure to meet consumer demands and the need to be competitive, the question of quality is becoming a central point in agro-food chains organization. It is well know ..."
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document for non-commercial purposes by any means, provided than this copyright notice appears on all such copies. With the constant pressure to meet consumer demands and the need to be competitive, the question of quality is becoming a central point in agro-food chains organization. It is well known that quality is dependent upon the characteristics on inputs obtained from growers. But the action of the grower in producing a quality product is rarely observed by the processor, which generates moral hazard problems. Consequently, once a processor decides to acquire his input needs, a difficult question must be resolved. Should his input be acquired via contract with growers, or is it more efficient to buy it on the spot market? The study of vertical relationships has come to be dominated by the principal-agent framework in agriculture (Otsuka, Chuma and Hayami, 1992). From this theory, it is well known that when measuring grower’s effort is expensive, an incentive share contract can be appropriate second best in addressing underlying moral hazard problems (Stiglitz, 1974): it provides incentive but only by imposing risk on the grower. Thus, trading off the loss from too little incentive against that from too great risk bearing defines the optimal share contract (Bell and Zusman, 1976; Stiglitz, 1988). In this approach, protecting input quality has been suggested to be a possible motivation for the use of contracts over the spot market alternative, especially in the
AGRICULTURAL ECONOMICS: A BRIEF INTELLECTUAL HISTORY by
, 2006
"... CIFAP Working Papers are published without formal review within the Department of Applied ..."
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CIFAP Working Papers are published without formal review within the Department of Applied
INCENTIVE SYSTEMS FOR FOOD QUALITY CONTROL WITH REPEATED DELIVERIES: SALMONELLA CONTROL IN PORK PRODUCTION
"... This paper presents a dynamic principal-agent analysis of incentive systems for salmonella control in pork production. Based on the producer’s performance history in controlling salmonella, the incentive systems analyzed determine salmonella testing frequencies for hogs delivered, as well as charges ..."
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This paper presents a dynamic principal-agent analysis of incentive systems for salmonella control in pork production. Based on the producer’s performance history in controlling salmonella, the incentive systems analyzed determine salmonella testing frequencies for hogs delivered, as well as charges to the producer for testing and penalties for substandard salmonella control. Using cost estimates and technical parameters based on Dutch data, we evaluate two dynamic incentive systems for quality assurance. We also assess the impact of ownership structure on overall chain performance, considering slaughter plant ownership by a producer cooperative and by investors who are not pork producers.
GOVERNANCE FOR QUALITY MANAGEMENT IN SMALLHOLDER-BASED TROPICAL FOOD CHAINS
"... Paper prepared for presentation at the 106th seminar of the EAAE Pro-poor development in low income countries: Food, agriculture, trade, and environment ..."
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Paper prepared for presentation at the 106th seminar of the EAAE Pro-poor development in low income countries: Food, agriculture, trade, and environment
1 Double Sided Moral Hazard and Share Contracts in agriculture
"... Abstract — This paper develops a double-sided moral hazard model of share contract in agriculture, with imperfect quality measurement by the agent and the principal, who contribute to the final good quality in terms of production effort and marketing effort respectively. Using this model, we analyse ..."
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Abstract — This paper develops a double-sided moral hazard model of share contract in agriculture, with imperfect quality measurement by the agent and the principal, who contribute to the final good quality in terms of production effort and marketing effort respectively. Using this model, we analyse the implications of the share contract for quantity and quality, often ignored in previous analysis. With the help of a simulation exercise, we prove that the outcome-conditioned share generally weakens the agent´s incentive to make effort in quality input. This finding could explain the contractual evidence in some differentiated markets such as the wine market, where bottle-price conditioned contracts are rarely used.
