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Contract Incentives And Excessive Nitrogen Use In Agriculture

  • Preckel, Paul V.
  • Shively, Gerald E.
  • Baker, Timothy G.
  • Chu, Mei-Chin
  • Burrell, Jessica Eide

This study examines incentives for input use under tournament contracts. We analyze implications of contract design for nitrate-based environmental externalities generated by agricultural producers. Outcomes are compared from contracts awarded by tournament to those from fixed-payment contracts. Our findings show contract insecurity can distort input use. The model developed in this analysis is applied to a region of the U.S. where tournament-based production is prevalent and groundwater contamination is a problem. We find contract insecurity increases nitrogen use by about 12%, resulting in a 17% increase in nitrate leaching. Implications for contract modification to reduce environmental externalities while maintaining contract incentives are discussed.

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File URL: http://purl.umn.edu/30902
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Article provided by Western Agricultural Economics Association in its journal Journal of Agricultural and Resource Economics.

Volume (Year): 25 (2000)
Issue (Month): 02 (December)
Pages:

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Handle: RePEc:ags:jlaare:30902
Contact details of provider: Web page: http://waeaonline.org/

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  1. Agrawal, Pradeep, 1999. "Contractual structure in agriculture," Journal of Economic Behavior & Organization, Elsevier, vol. 39(3), pages 293-325, July.
  2. Boehlje, Michael, 1996. "Industrialization of Agriculture: What are the Implications?," Choices, Agricultural and Applied Economics Association, vol. 11(1).
  3. Allen, Douglas W. & Lueck, Dean, 1999. "Searching For Ratchet Effects In Agricultural Contracts," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(02), December.
  4. Eswaran, Mukesh & Kotwal, Ashok, 1985. "A Theory of Contractual Structure in Agriculture," American Economic Review, American Economic Association, vol. 75(3), pages 352-67, June.
  5. Just, Richard E. & Pope, Rulon D., 1978. "Stochastic specification of production functions and economic implications," Journal of Econometrics, Elsevier, vol. 7(1), pages 67-86, February.
  6. Gibbons, R. & Murphy, K.J., 1989. "Relative Performance Evaluation For Chief Executive Officers," Working papers 532, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Theofanis Tsoulouhas & Tomislav Vukina, 1999. "Integrator Contracts with Many Agents and Bankruptcy," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(1), pages 61-74.
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