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Option Contracts as a Solution to the Holdup Problem in Agri‐food Markets
Author(s) -
Vercammen James
Publication year - 2000
Publication title -
canadian journal of agricultural economics/revue canadienne d'agroeconomie
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 37
eISSN - 1744-7976
pISSN - 0008-3976
DOI - 10.1111/j.1744-7976.2000.tb00416.x
Subject(s) - commodity , investment (military) , simple (philosophy) , work (physics) , asset (computer security) , microeconomics , economics , business , finance , computer science , engineering , mechanical engineering , philosophy , computer security , epistemology , politics , political science , law
It is well known that incomplete contracts, together with asset specific investment, can result in investment holdup because of opportunistic behavior by either the commodity producer or the processor. In recent years, several papers have shown how contracts which explicitly account for ex post renegotiation can reduce or eliminate the holdup problem. In one particularly promising type of analysis, a simple option contract is awarded to the upstream producer. In this paper, it is shown that if the source of risk is with respect to the value of the processed commodity, then a producer option contract does not work but a processor option contract does work to eliminate the holdup problem. A simple example is used to illustrate the main findings.