An agency/transactions-costs approach and application to vertical coordination arrangements in food and agricultural markets

A micro-analytic approach based on an integration of elements from Agency and Transactions-cost theories, was followed to develop a theoretical framework for characterizing vertical coordination decisions at the firm level. Vertical coordination modes were defined as all possible arrangements between buyers and sellers along a continuum including spot markets and vertical integration at the extremes, and contracts in between. By including asset specificity in a principal-agent model under conditions of uncertainty and different risk attitudes, the study's main argument has been that both individuals' characteristics (such as risk attitudes, leverage position, and size) and transaction attributes jointly determine optimal vertical coordination mode decisions. An experimental design approach with an application to crop contracting in East Central Illinois, was followed to test the study's hypotheses. In addition to supporting transactions-costs arguments and mainly the significant effect of asset specificity in driving organizational form choice, the results further suggest that a joint treatment of transaction and individual characteristics is warranted, for explaining and predicting vertical coordination or organizational form decisions.