Brent Hueth

Incentive Instruments in Fruit and Vegetable Contracts: Input Control, Monitoring, Measuring, and Price Risk

This article examines the structure of contractual relations between growers and first handlers in California fruit and vegetable markets. Evidence on existing structures is collected from on-site interviews and from a small mail survey of market intermediaries who contract with independent growers. Four generic instruments are identified—input control, field visits, quality measurement, and residual price risk—which are used to coordinate relations between growers and first handlers and which help to alleviate information asymmetries and align incentives between contracting parties. Drawing from our interviews and survey, we offer examples of how each of these instruments are employed.

Producer Price Risk and Quality Measurement

Risk-averse farmers in the produce industry grow a product whose market price is often quite unpredictable. Shippers or other intermediaries shield the farmer from much of this price risk; however, actual contracts between growers and shippers vary considerably across commodities in the residual price risk growers face. We hypothesize that imperfect quality measurement results in a moral hazard problem, and that price provides additional information regarding quality. As a consequence, an efficient contract does not shield growers from all idiosyncratic price risk. We examine this hypothesis for the case of fresh-market tomatoes. Copyright 1999, Oxford University Press.

Agricultural Markets as Relative Performance Evaluation

Relative performance schemes such as tournaments are commonly used in markets for a variety of livestock and processing commodities, while explicit versions of these schemes are rarely used in markets for fresh fruits and vegetables and specialty grains. We show how contracts for these latter commodities do in fact provide relative performance incentives, albeit indirectly, via a payment mechanism that depends on market prices. In such contracts, compensation is often an increasing function of revenue; this implements a relative performance scheme by making each growers payment an increasing function of his own output but a decreasing function of others output.

An Essay on Cooperative Bargaining in U.S. Agricultural Markets

We study the incidence and economic rationale for cooperative bargaining in U.S. agricultural markets. Bargaining is not just about increasing price paid to farmers; indeed, there is no empirical research indicating that cooperative bargaining has any direct influence on price. Nevertheless, the price negotiation process may be useful in itself as a form of price discovery in markets where there is uncertainty about market supply and demand conditions, and bargaining associations can play an important role in ensuring contract reliability. These and other benefits must be weighed against the organizational and on-going operational costs of a formal bargaining association when considering whether bargaining is appropriate for a given market environment. Even when the aggregate net benefits associated with bargaining are positive, the distribution of benefits across the various market participants may have an important influence on the political feasibility of bargaining

Agricultural Supply Response Under Contract

Agricultural producers typically face considerable production and price risk in their operations. As a result, the role of risk in shaping farm-level decisions has been the focus of much research (e.g., Moschini and Hennessy). But why do risk-averse producers face such risk? In a world of complete markets and perfect information, a profit-maximizing intermediary would provide full insurance to producers. Thus, some aspect of the production and marketing of agricultural commodities must limit the scope for this type of insurance. When considering reasons why growers of fresh produce might face price risk, Hueth and Ligon suggest the possibility of unobserved actions in the provision of quality. If quality cannot be measured perfectly, and some downstream price contains information about a farmers investment in quality, then conditioning a growers compensation on this price may help the intermediary to monitor farmer effort. A similar argument holds in the case of production risk: if unobserved actions influence yield, an optimal compensation scheme might expose farmers to considerable production risk in order to provide incentive for high output. This suggests that the type of intermediation available to farmers can have important consequences for the risks that farmers face. Previous analyses of the role of risk in producer decisions make one of two polar assumptions regarding intermediation: either there is none (e.g., Sandmo, Leland), or producers have access to an exogenously specified source of intermediation that may take the form of a futures market (e.g., Holthausen), public or private insurance (e.g., Ramaswami, Babcock and Hennessy), or perhaps a particular government program (e.g., Lin, Chavas and Holt). Although each of these analyses represent important contributions toward an understanding of how producers respond in different risk environments, they are each silent on how the institutions themselves

The Goals of U.S. Agricultural Policy: A Mechanism Design Approach

This article examines motivations underlying the governments choice of alternative policy mechanisms for subsidizing agriculture. Optimal policies are analyzed for three government objectives: one where the government wishes to ensure a minimum level of net income for all farmers, a second where the governments only concern is to transfer income from consumers and taxpayers to the farm sector, and a final “augmented” income-transfer objective. The analysis offers an explanation for agricultural policy mechanisms that involve overproduction by high-cost producers, relative to a free-market equilibrium. Such a distortion might arise from the existence of nonmarket values for the production of relatively high-cost farmers in the governments objective. Copyright 2000, Oxford University Press.

Contracts and Risk in Agriculture: Conceptual and Empirical Foundations

Though farm-level risks, risk attitudes, and associated behavioral consequences have been extensively investigated by agricultural economists, comparatively little research has focused on why farmers face risk. It is evident that markets for agricultural production and price risk are generally incomplete. Even in commodities with well-developed markets for price futures, farmers still face considerable production risk; for example, attempts to establish private (unsubsidized) insurance markets for multiple-peril yield risks have universally failed (Knight and Coble 1997). The natural conclusion to draw from this and other supporting evidence is that farmers face risk because it is organizationally efficient. The costs of farm-level risk are well documented. It follows that there must be significant benefits associated with farmers’ exposure to risk. Contract theory, and principal-agent theory in particular, provides a decision environment where these benefits are explicitly modeled, and hence where farmers’ exposure to risk can be endogenized.1