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Balancing Grower Protection Against Agency Concerns: An Economic Analysis of Contract Termination Damages

  • Lee, Myoungki
  • Wu, Steven Y.
  • Fan, Maoyong

This study examines legislation that would grant growers termination damages if their contracts are terminated. Our model suggests that, with no contracting frictions, damages would not reduce ex ante efficiency as processors can contract around damages through contract restructuring. Growers would earn less under continuation but would be protected if terminated, although overall expected profits would be unaffected. However, when contracting friction exist, then efficiency losses can occur as processors would be constrained in restructuring contractual incentives to deal with moral hazard. Growers' expected profits would increase while processors' profit would decrease.

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File URL: http://purl.umn.edu/42461
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Article provided by Western Agricultural Economics Association in its journal Journal of Agricultural and Resource Economics.

Volume (Year): 33 (2008)
Issue (Month): 2 (August)
Pages:

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Handle: RePEc:ags:jlaare:42461
Contact details of provider: Web page: http://waeaonline.org/

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  1. Tsoulouhas, Theofanis & Vukina, Tomislav, 2000. "Regulating Broiler Contracts: Tournaments Versus Fixed Performance Standards," 2000 Annual meeting, July 30-August 2, Tampa, FL 21833, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  2. S. Andrew Starbird, 2005. "Moral Hazard, Inspection Policy, and Food Safety," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(1), pages 15-27.
  3. MacDonald, James M. & Perry, Janet E. & Ahearn, Mary Clare & Banker, David E. & Chambers, William & Dimitri, Carolyn & Key, Nigel D. & Nelson, Kenneth E. & Southard, Leland W., 2004. "Contracts, Markets, and Prices: Organizing the Production and Use of Agricultural Commodities," Agricultural Economics Reports 34013, United States Department of Agriculture, Economic Research Service.
  4. Nisvan Erkal, 2003. "Buyer-Supplier Interaction, Asset Specificity, And Product Choice," Department of Economics - Working Papers Series 885, The University of Melbourne.
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