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Optimal contract design under asymmetric information to incentivize preconditioning calves for feedlots

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  • Verteramo Chiu, Leslie J.
  • Tauer, Loren W.
  • Grohn, Yrjo T.

Abstract

We analyze the equilibrium conditions in which contracts are desirable for firms (buyers) with various levels of management efficiencies procuring a factor input under two levels of quality from supplies. The quality of the factor input, which affects production efficiency, may be known to the buyer; the efficiency of the firm is not known to the supplier. We estimate, using principal-agent models, that firms with high-management efficiency do not have the incentive to pay a quality premium to suppliers, but firms operating with low management efficiency are willing to offer a price premium for quality. The model is applied to the question of preconditioning cattle for the feedlot.

Suggested Citation

  • Verteramo Chiu, Leslie J. & Tauer, Loren W. & Grohn, Yrjo T., 2025. "Optimal contract design under asymmetric information to incentivize preconditioning calves for feedlots," Agricultural and Resource Economics Review, Cambridge University Press, vol. 54(2), pages 387-407, August.
    • Handle: RePEc:cup:agrerw:v:54:y:2025:i:2:p:387-407_3
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