Institutional Structure in Corporate Agriculture

In this dissertation, a state-contingent, principal-agent model is developed to examine the institution of input provision by a corporate firm that contracts with agents for the production of a given commodity. "Input provision" entails not only the provision and delivery of key inputs by the principal but also their purchases (or in-house production), as well as contract design to ensure their optimal use. The provision of key inputs is modeled in the context of production contracts for poultry and pork, such as those offered by Perdue Farms, Smithfield Foods, and Tyson Foods in the United States. The decision in question is the levels of inputs (e.g. feed, medication) that the contracting company provides to the farmer. This decision is endogenous to the model, and facilitates comparison of production contracts (input provision) with marketing contracts (no input provision, with all inputs purchased and/or provided by the farmer himself). The theoretical model formalizes Coase's idea that an institutional arrangement emerges if the benefits associated with it exceed the costs. In particular, I characterize the case of no input provision as a corner solution for the optimal choice of inputs provided. The extent of input provision, in turn, reflects "limits to firm size". I also examine conditions under which incentives relating to one of two output dimensions (produced by the agent) tend to zero, when both dimensions are observable and verifiable. The state-contingent approach is used as it allows for a general production technology, and the inclusion of transaction costs in a general theoretical model. The possibility of reservation utility being endogenous in dyadic relationships is also examined. This is explored formally by incorporating pre-contract interactions in a contractual framework with the principal and the agent competing as independent producers prior to contracting. Investment decisions of the principal in this framework favorably impact his variable costs both as an independent producer and as the principal party to a contract. I show that the higher these benefits, the stronger is the incentive for the principal to decide in favor of higher initial investment levels and realize a more competitive position vis-à-vis the smaller producer.