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Estimation Of An Optimal Tomato Contract

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  • Hueth, Brent
  • Ligon, Ethan

Abstract

This paper estimates an agency model of contracts used in California's processing-tomato industry. Model estimation proceeds in three stages. We first estimate growers' stochastic production possibilities, and then, for a given vector of preference parameters, compute an optimal compensation schedule. Finally, we compare computed compensations with actual compensations and choose preference parameters to minimize distance between the two. Assuming perfect competition and risk neutrality for processors, we obtain an estimate of .08 for growers' measure of constant absolute risk aversion (where returns are measured in units of $100/ton), and find that growers' effort cost is 1.8% of total operating cost. Welfare losses from information constraints are estimated at .59% of mean compensation, and quality measurement improves efficiency (measured as a percentage increase in expected quality) by 1.08%.

Suggested Citation

  • Hueth, Brent & Ligon, Ethan, 2001. "Estimation Of An Optimal Tomato Contract," 2001 Annual meeting, August 5-8, Chicago, IL 20560, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea01:20560
    DOI: 10.22004/ag.econ.20560
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    References listed on IDEAS

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    1. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    2. Kim, Son Ku, 1995. "Efficiency of an Information System in an Agency Model," Econometrica, Econometric Society, vol. 63(1), pages 89-102, January.
    3. Christopher Ferrall & Bruce Shearer, 1999. "Incentives and Transactions Costs Within the Firm: Estimating an Agency Model Using Payroll Records," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(2), pages 309-338.
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    Cited by:

    1. Mussell, Al, 2003. "PRICE DISCOVERY MECHANISMS AND ALTERNATIVES FOR CANADIAN AGRICULTURE; Part II: A Review of Pricing Mechanisms from the Economic Literature," Miscellaneous Publications 18100, George Morris Center.

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    Keywords

    Crop Production/Industries;

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