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Do Contracting Incentives Matter?

Author

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  • Alexander, Corinne E.
  • Goodhue, Rachael E.
  • Rausser, Gordon C.

Abstract

Agency theory explanations for agricultural contract designs are often observationally equivalent to perfect information explanations. Further in order to test properly the hypothesis that moral hazard is important one must first test and accept the hypothesis that agents respond to contract incentives. If agents do not respond to contract incentives then it is unlikely that moral hazard is significant. Accordingly we move beyond contract design and focus on whether or not we can reject the hypothesis that moral hazard is important by examining growers responses to price incentives for processing tomato quality. We utilize a natural experiment. In our data set growers deliver processing tomatoes under a price incentives contract and for a fixed price per ton. We compare the quality of the tomatoes delivered under the two arrangements. Our results suggest that growers indeed do respond to price incentives by improving tomato quality.

Suggested Citation

  • Alexander, Corinne E. & Goodhue, Rachael E. & Rausser, Gordon C., 1999. "Do Contracting Incentives Matter?," 2000 Conference (44th), January 23-25, 2000, Sydney, Australia 123595, Australian Agricultural and Resource Economics Society.
    • Handle: RePEc:ags:aare00:123595
    DOI: 10.22004/ag.econ.123595
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    References listed on IDEAS

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    1. Theofanis Tsoulouhas & Tomislav Vukina, 1999. "Integrator Contracts with Many Agents and Bankruptcy," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(1), pages 61-74.
    2. Siebert, Jerry, 1997. "California Agriculture Issues and Challenges," Monographs, University of California, Davis, Giannini Foundation, number 263826, December.
    3. Brent Hueth & Ethan Ligon, 1999. "Producer Price Risk and Quality Measurement," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(3), pages 512-524.
    4. Rachael E. Goodhue, 1999. "Input Control in Agricultural Production Contracts," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(3), pages 616-620.
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    Keywords

    Demand and Price Analysis;

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