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Interactions between Explicit and Implicit Contracting: Evidence from California Agriculture

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  • Hueth, Brent
  • Ligon, Ethan
  • Melkonyan, Tigran A.

Abstract

We examine interactions among explicit and implicit contracting practices for a sample of 385 intermediaries in California fruit and vegetable markets. Explicit practices are measured with an indicator for the existence of a formal contract, and with indicators for various contract specifications (e.g., target delivery date, volume, acreage). Implicit practices are measured directly with a question about the existence of an “implicit understanding,” and indirectly with questions about the extent of informal involvement in farm-level decision making. Firms that manufacture processed foods, and that grow in house a portion of their total farm input, are significantly more likely to report use of explicit and implicit contracting practices. Additionally, unobserved factors that influence the use of explicit and implicit contracting are positively correlated. These findings suggest a complementary relationship between formal and informal contracts.

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Bibliographic Info

Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida with number 6068.

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Date of creation: 2008
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Handle: RePEc:ags:aaea08:6068

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Keywords: Agribusiness; Farm Management;

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  1. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
  2. Klein, Benjamin & Murphy, Kevin M, 1997. "Vertical Integration as a Self-Enforcing Contractual Arrangement," American Economic Review, American Economic Association, vol. 87(2), pages 415-20, May.
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  4. Hideshi Itoh & Hodaka Morita, 2006. "Formal Contracts, Relational Contracts, and the Holdup Problem," CESifo Working Paper Series 1786, CESifo Group Munich.
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  11. W. Bentley MacLeod & James M. Malcomson, 1986. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Working Papers 585, Queen's University, Department of Economics.
  12. Hueth, Brent & Ligon, Ethan & Wolf, Stephen & Wu, Steven, 1999. "Incentive Instruments in Agricultural Contracts: Input Control, Monitoring, Quality Measurement, and Price Risk," Staff General Research Papers 5237, Iowa State University, Department of Economics.
  13. Brent Hueth & Ethan Ligon & Carolyn Dimitri, 2007. "Agricultural Contracts: Data and Research Needs," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(5), pages 1276-1281.
  14. Georg Kirchsteiger & Ernst Fehr & Simon Gächter, 1997. "Reciprocity as a contract enforcement device: experimental evidence," ULB Institutional Repository 2013/5911, ULB -- Universite Libre de Bruxelles.
  15. Frey, Bruno S & Jegen, Reto, 2001. " Motivation Crowding Theory," Journal of Economic Surveys, Wiley Blackwell, vol. 15(5), pages 589-611, December.
  16. Abhijit V. Banerjee & Esther Duflo, 2000. "Reputation Effects And The Limits Of Contracting: A Study Of The Indian Software Industry," The Quarterly Journal of Economics, MIT Press, vol. 115(3), pages 989-1017, August.
  17. Armin Falk & Michael Kosfeld, . "Distrust - The Hidden Cost of Control," IEW - Working Papers 193, Institute for Empirical Research in Economics - University of Zurich.
  18. Brent Hueth & Ethan Ligon, 2002. "Estimation of an efficient tomato contract," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 29(2), pages 237-253, June.
  19. Pearce, David G. & Stacchetti, Ennio, 1998. "The Interaction of Implicit and Explicit Contracts in Repeated Agency," Games and Economic Behavior, Elsevier, vol. 23(1), pages 75-96, April.
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