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

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