The Extent and Nature of Contracting in the Wine Supply-Chain When Moral Hazard is Present

This paper explores an optimal sharing contract between a grape grower and a winery, when a risk-averse grower allocates efforts among multiple activities that differe in measurability, while double-sided moral hazard is assumed to be present. The contract allows for asymmetric quality contributions by the grape grower and the winery, and is conditioned on both the value of joint production outcomes as well as on the performance evaluation from monitoring. The model is motivated by the use of residual claimancy in the wine industry. Through comparative static analysis of the Pareto optimal share, the model provides insights into the extent and nature of contracting in the wine industries of Australia, New Zealand, California and Spain.