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Unilateral vs. Bilateral Incentives: Evidence from the U.S. Pork Industry

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  • Jang, Jongick
  • Miller, Douglas J.
  • Sykuta, Michael E.
  • Won, Seoung Joun

Abstract

The idea that individuals adapt their behaviors in response to changes in incentive systems is fundamental to most economic analysis. This paper incorporates the concept of price discovery costs into the incentive theory to offer a theoretical model and empirical evidence on the differential incentive effects of long-term contracts and spot markets. Using the US pork industry case where procuring intertemporally consistent weights of hogs have been critical to pork processors, we show why the effectiveness of unilaterally determined and posted incentive price for the hog quality by the pork packers on the intertemporal consistency erodes and why a bilateral incentive structure built through long-term hog procurement contracts is demanded, in the presence of volatile hog price and feed price movements. The MGARCH model analysis of USDA AMS data supported our hypotheses that long-term hog procurement contracts would help moderate the erosion relative to the spot markets, resulting greater intertemporal consistency of hog weights.

Suggested Citation

  • Jang, Jongick & Miller, Douglas J. & Sykuta, Michael E. & Won, Seoung Joun, 2009. "Unilateral vs. Bilateral Incentives: Evidence from the U.S. Pork Industry," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49521, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea09:49521
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    File URL: http://purl.umn.edu/49521
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    Keywords

    long-term contracts; incentive effects; price discovery costs; MGARCH model; Livestock Production/Industries;

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