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Relational Contracting and Allocation of Decision Rights in the Agri-Food Industry: Producer Contracts and Food Safety

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  • Karantininis, Kostas
  • Graversen, Jesper T.
  • Rasmussen, Hans Jacob Nymann

Abstract

We apply a formal theoretical model of adaptation to two empirical settings within the agri-food industry: specialized pig production and food safety in Denmark. The objective is to allocate decision rights ex ante so that actual decisions taken ex post will optimize the profit accruing to the two parties in a contractual or integrative relation. Two applications are presented in this paper: First an actual partnership between two pork producers in Denmark. Based on detailed budgets we develop detailed schedules for the “reneging temptations” of the two partners- These are the temptations to renege on the contract during the evolution of the partnership. Using a model developed by Baker, Gibbons and Murphy (2006) we calculate equilibria using the Folk theorem in order to determine which is the best allocation of decision rights. We find that the existing allocation of decision rights in the case we examine is efficient in the sense that it results into a second best allocation. Using the same modelling approach we present a second application on salmonella control related to end-feeding, that is, salmonella contamination of pork due to filled bellies of pigs fed for the last 12 hours before delivery. Based on appropriate assumptions, the parties should give the decision right (whether to end-feed or not) to the slaughterhouse in order to reach the firstbest solution which, given the assumptions, is feasible

Suggested Citation

  • Karantininis, Kostas & Graversen, Jesper T. & Rasmussen, Hans Jacob Nymann, 2008. "Relational Contracting and Allocation of Decision Rights in the Agri-Food Industry: Producer Contracts and Food Safety," 110th Seminar, February 18-22, 2008, Innsbruck-Igls, Austria 49877, European Association of Agricultural Economists.
  • Handle: RePEc:ags:eea110:49877
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    References listed on IDEAS

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    1. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    2. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
    3. Holmstrom, Bengt R. & Tirole, Jean, 1989. "The theory of the firm," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 2, pages 61-133 Elsevier.
    4. Arrunada, Benito & Garicano, Luis & Vazquez, Luis, 2001. "Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution," Journal of Law, Economics, and Organization, Oxford University Press, vol. 17(1), pages 257-284, April.
    5. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-480, March.
    6. Peter Bogetoft, 1997. "DEA-based yardstick competition: The optimality of best practice regulation," Annals of Operations Research, Springer, vol. 73(0), pages 277-298, October.
    7. Holmstrom, Bengt, 1999. "The Firm as a Subeconomy," Journal of Law, Economics, and Organization, Oxford University Press, vol. 15(1), pages 74-102, April.
    8. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-991, September.
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    More about this item

    Keywords

    Theory of the firm; Adaptation theory; Contracts; Decision Rights; Pig production; Food safety; Agribusiness; Agricultural and Food Policy; Farm Management; Food Consumption/Nutrition/Food Safety; Industrial Organization; D21; L2; Q1;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture

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