Unilateral vs. Bilateral Incentives: Evidence from the U.S. Pork Industry

35 Pages Posted: 16 May 2010

See all articles by Michael E. Sykuta

Michael E. Sykuta

University of Missouri at Columbia - Division of Applied Social Sciences

Douglas J. Miller

University of Missouri at Columbia - Department of Economics

Seoung Joun Won

Missouri Public Service Commission

Jongick Jang

Hanshin University

Date Written: July 1, 2009

Abstract

The idea that individuals adapt their behaviors in response to changes in incentive systems is fundamental to most economic analysis. This paper incorporates the concept of price discovery costs into the incentive theory to offer a theoretical model and empirical evidence on the differential incentive effects of long-term contracts and spot markets. Using the US pork industry case where procuring intertemporally consistent weights of hogs have been critical to pork processors, we show why the effectiveness of unilaterally determined and posted incentive price for the hog quality by the pork packers on the intertemporal consistency erodes and why a bilateral incentive structure built through long-term hog procurement contracts is demanded, in the presence of volatile hog price and feed price movements. The MGARCH model analysis of USDA AMS data supported our hypotheses that long-term hog procurement contracts would help moderate the erosion relative to the spot markets, resulting greater intertemporal consistency of hog weights.

Keywords: Long-Term Contracts, Incentive Effects, Price Discovery Costs, MGARCH Model

JEL Classification: D83, D86, L14, Q13

Suggested Citation

Sykuta, Michael E. and Miller, Douglas J. and Won, Seoung Joun and Jang, Jongick, Unilateral vs. Bilateral Incentives: Evidence from the U.S. Pork Industry (July 1, 2009). Available at SSRN: https://ssrn.com/abstract=1490591 or http://dx.doi.org/10.2139/ssrn.1490591

Michael E. Sykuta

University of Missouri at Columbia - Division of Applied Social Sciences ( email )

143 Mumford Hall
Columbia, MO 65211
United States
573-882-1738 (Phone)
573-884-3958 (Fax)

HOME PAGE: http://michaelsykuta.com

Douglas J. Miller

University of Missouri at Columbia - Department of Economics ( email )

118 Professional Building
Columbia, MO 65211
United States

Seoung Joun Won

Missouri Public Service Commission ( email )

573-751-3234 (Phone)
573-751-1847 (Fax)

HOME PAGE: http://www.psc.mo.gov

Jongick Jang (Contact Author)

Hanshin University ( email )

137 HANSHINDAE-GIL, OSAN-SI
GYEONGGI-DO
Korea, Republic of (South Korea)

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