Open Access
Performance‐based contracts in cattle feedlots
Author(s) -
Maples William E.,
DeVuyst Eric A.,
Wade Brorsen B.
Publication year - 2022
Publication title -
journal of the agricultural and applied economics association
Language(s) - English
Resource type - Journals
ISSN - 2769-2485
DOI - 10.1002/jaa2.10
Subject(s) - quality (philosophy) , purchasing , business , fed cattle , feeder cattle , information asymmetry , marketing , agricultural science , industrial organization , finance , environmental science , zoology , philosophy , epistemology , biology
Abstract Feeder cattle markets suffer from asymmetric information as sellers have information that buyers do not. Since buyers cannot fully determine the quality of feeder cattle, they pay for an “average” quality that is only adjusted by observable characteristics. A contract design is introduced that allows buyers to differentiate producers by offering a menu of contracts. The offered contracts contain a premium that is paid when a lot of cattle reach a target performance indicator, such as average daily gain. Results suggest the contract can successfully allow buyers to purchase high‐quality cattle, avoiding purchasing low‐quality cattle.