Premium
Broiler Production Contracts as a Multi‐Agent Problem: Common Risk, Incentives and Heterogeneity
Author(s) -
Goodhue Rachael E.
Publication year - 2000
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1111/0002-9092.00050
Subject(s) - moral hazard , adverse selection , economic rent , production (economics) , incentive , compensation (psychology) , microeconomics , agency (philosophy) , principal–agent problem , risk neutral , forcing (mathematics) , control (management) , economics , estimator , risk aversion (psychology) , selection (genetic algorithm) , business , actuarial science , computer science , expected utility hypothesis , finance , mathematics , financial economics , statistics , psychology , mathematical analysis , corporate governance , philosophy , management , epistemology , artificial intelligence , psychoanalysis
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.