Do Transaction Costs and Risk Preferences Influence Marketing Arrangements in the Illinois Hog Industry?

Studies of hog industry structure often invoke risk reduction and transaction costs explanations for empirical observations but fail to directly examine the core concepts of risk behavior and transaction costs theories. Using a more unified conceptual framework and unique survey and accounting data, this study demonstrates that that risk preferences and asset specificity impact Illinois producers’ use of contracts and spot markets as suggested by theory. Factor analytic methods limit measurement error for indirectly observable risk and transaction costs variables employed in logit regressions. In particular, related investments in specific hog genetics and specific human capital regarding the production process increase the probability of selecting long-tem contracts over spot markets. Producers who perceive greater levels of price risk and/or are more averse to it appear more (less) likely to use long-term contracts (spot markets), and hence, to make such investments.