Broiler Production Contracts as a Multi‐Agent Problem: Common Risk, Incentives and Heterogeneity

17 Pages Posted: 24 Mar 2020

See all articles by Rachael E. Goodhue

Rachael E. Goodhue

University of California, Davis - Department of Agricultural and Resource Economics

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Date Written: August 2000

Abstract

The broiler industry presents two puzzles regarding production contracts: why do processors control growers' inputs, and why do they use a statistically insufficient estimator to calculate growers' compensation? This paper provides an agency theoretic framework that explains these puzzles in terms of processors' response to grower heterogeneity and production risk and to grower risk aversion. Processors control inputs to reduce the information rents paid to agents. By forcing agents to bear additional income risk through the use of an imprecise estimator, processors can increase profits, due to the combined moral hazard‐adverse selection nature of the informational problem.

Keywords: agency theory, production contracts, L140, Q130

Suggested Citation

Goodhue, Rachael E., Broiler Production Contracts as a Multi‐Agent Problem: Common Risk, Incentives and Heterogeneity (August 2000). American Journal of Agricultural Economics, Vol. 82, Issue 3, pp. 606-622, 2000, Available at SSRN: https://ssrn.com/abstract=3558055 or http://dx.doi.org/10.1111/0002-9092.00050

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