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Simulating The Impacts Of Contract Supplies In A Spot Market-Contract Market Equilibrium Setting

  • Jaenicke, Edward C.
  • Wang, Yanguo
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    This paper embeds a principal-agent model of producer-processor equilibrium within a market equilibrium model of contract and cash markets to analyze the impact of contracting on the spot market for hogs. The principal-agent model incorporates both quality differentiation in the contract market and an endogenously determined cash market price to account for processor-producer relationships in equilibrium. For five types of contracting scenarios, market equilibrium conditions are derived, and results are presented for a numerical example. Contrary to previous results, the paper finds that the increased supply of hogs under typical formula-price contracts can increase the cash market price and reduce its variance.

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    File URL: http://purl.umn.edu/20313
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    Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2004 Annual meeting, August 1-4, Denver, CO with number 20313.

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    Date of creation: 2004
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    Handle: RePEc:ags:aaea04:20313
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    1. Brent Hueth & Ethan Ligon, 1999. "Producer Price Risk and Quality Measurement," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(3), pages 512-524.
    2. Martin, Laura L., 1997. "Production Contracts, Risk Shifting, And Relative Performance Payments In The Pork Industry," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 29(02), December.
    3. 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.
    4. Azzeddine Azzam, 1998. "Captive Supplies, Market Conduct, and the Open-Market Price," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 76-83.
    5. Ward, Clement E. & Koontz, Stephen R. & Schroeder, Ted C., 1998. "Impacts From Captive Supplies On Fed Cattle Transaction Prices," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(02), December.
    6. Rachael E. Goodhue, 2000. "Broiler Production Contracts as a Multi-Agent Problem: Common Risk, Incentives and Heterogeneity," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(3), pages 606-622.
    7. Lawrence, John D. & Schroeder, Ted C. & Hayenga, Marvin L., 2001. "Evolving Producer-Packer-Customer Linkages in the Beef and Pork Industries," Staff General Research Papers 2060, Iowa State University, Department of Economics.
    8. Buhr, Brian L. & Kunkel, Phillip L., 1999. "A Guide To Swine Marketing Contracts," Staff Papers 13358, University of Minnesota, Department of Applied Economics.
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