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

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

Abstract

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.

Suggested Citation

  • Lee, Myoungki & Wu, Steven Y. & Fan, Maoyong, 2008. "Balancing Grower Protection Against Agency Concerns: An Economic Analysis of Contract Termination Damages," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 33(2), pages 1-15.
    • Handle: RePEc:ags:jlaare:42461
    DOI: 10.22004/ag.econ.42461
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    References listed on IDEAS

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    1. 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 Economic Reports 34013, United States Department of Agriculture, Economic Research Service.
    2. Lewin-Solomons, S., 2000. "Asset Specificity and Hold-up in Franchising and Grower Contracts: A Theoretical Rationale for Government Regulation?," Cambridge Working Papers in Economics 0013, Faculty of Economics, University of Cambridge.
    3. Erkal, Nisvan, 2007. "Buyer-supplier interaction, asset specificity, and product choice," International Journal of Industrial Organization, Elsevier, vol. 25(5), pages 988-1010, October.
    4. Theofanis Tsoulouhas & Tomislav Vukina, 2001. "Regulating Broiler Contracts: Tournaments Versus Fixed Performance Standards," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(4), pages 1062-1073.
    5. James Andreoni & William Harbaugh & Lise Vesterlund, 2003. "The Carrot or the Stick: Rewards, Punishments, and Cooperation," American Economic Review, American Economic Association, vol. 93(3), pages 893-902, June.
    6. Roe, Brian E. & Wu, Steven Y., 2003. "The Welfare Effects Of Banning Tournaments When Commitment Is Impossible: Some Results From The Broiler Sector," 2003 Annual meeting, July 27-30, Montreal, Canada 22151, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    7. Bebchuk, Lucian Ayre & Shavell, Steven, 1991. "Information and the Scope of Liability for Breach of Contract: The Rule of Hadley vs. Baxendale," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(2), pages 284-312, Fall.
    8. 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.
    9. Armando Levy & Tomislav Vukina, 2004. "The League Composition Effect in Tournaments with Heterogeneous Players: An Empirical Analysis of Broiler Contracts," Journal of Labor Economics, University of Chicago Press, vol. 22(2), pages 353-378, April.
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    Cited by:

    1. Steven Y. Wu, 2014. "Adapting Contract Theory to Fit Contract Farming," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 96(5), pages 1241-1256.
    2. Wu, Steven Y., 2013. "Adapting Contract Theory to Fit Contract Farming," 2014 Allied Social Sciences Association (ASSA) Annual Meeting, January 3-5, 2014, Philadelphia, PA 161894, Agricultural and Applied Economics Association.
    3. Salas, Paula Cordero, 2012. "Does Contract Enforcement Limit the Distribution of Bargaining Power? An Experimental Study," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124503, Agricultural and Applied Economics Association.
    4. Cordero Salas, Paula, 2016. "Relational Contracts and Product Quality: The Effect of Bargaining Power on Efficiency and Distribution," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 41(3), pages 1-19.

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    Farm Management;

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