Optimal Incentive Structure in Cattle Feeding Contracts Under Alternative Fed Cattle Pricing Methods

Developing a multitask principal-agent model, this paper theoretically analyzes the incentive provisions in the existing cattle feeding contracts under alternative fed cattle pricing methods. Comparative statics from the theoretical model are evaluated by simulation experiments. Feedlot and carcass performance of a large set of feeder steers are simulated employing a dynamic and deterministic bio-physical growth model adapted from the animal science literature. The cattle feeder and the owner's stochastic costs and returns under alternative production technologies and market conditions are then calculated by combining cattle performance data with historical price data. The main finding of this study is that the yardage fee contract is optimal for the cattle owner when the fed cattle are to be priced on the grid and the cost of gain contract is optimal when the cattle are to be marketed according to the live or dressed weight pricing methods.