Three essays on agricultural contracting: Incorporating market equilibrium and dynamics into principal-agent models

Motivated by several contemporary problems existing in U.S. agriculture, this thesis investigates three particular issues concerning different aspects of agricultural contracting between growers and processors. Specifically, the first essay investigates the relationship between the use of various types of hog contracts and the performance of the spot market when information asymmetries exist with regard to observability of product quality. This essay contributes to the existing literature by embedding a principal-agent model of processor-producer behavior within a general equilibrium model of the hog market. Different from the results in most past studies, this essay concludes that contract supplies raise the expected spot market price and reduce the variance of spot market price under a formula-price contract. Moreover, this essay finds that both a formula-price contract and a cost-plus contract offer a greater profit to processors and a greater expected utility to growers relative to fixed-price or market-price contacts. The second essay discusses efficiency of broiler contracts out of concerns of growers dissatisfaction with the existing relative-performance contracts. Specifically, this essay compares various relative-performance contracts with fixed-performance contracts in a dynamic setting, and discusses improvements of the static mixed-type relative-performance contract. Various theoretical specifications justify the superiority of relative-performance contracts both in a static setting and in a dynamic setting when common shocks dominate idiosyncratic shocks. In addition, a static two-pooled-tournament relative-performance contract is shown to improve both the processors and the growers welfare relative to the static single-tournament relative-performance contract. The third essay investigates the role of growers reputation when an agricultural processor designs optimal incentives for better quality products in a two-period dynamic contract. In a dynamic model with no commitment by both parties, reputation effects embodied in the processors posterior probability assessment of the growers types (using Bayes rule) reinforce the potential well-known ratchet effect. Based on the optimal dynamic contract with no commitment, the processor offers a direct reputation reward to the grower contingent on his past performance. This essay demonstrates that the optimal dynamic contract with a reputation reward would outperform contracts where no reputation reward is offered.