Balancing Grower Protection Against Agency Concerns: An Economic Analysis of Contract Termination Damages
Journal of Agricultural and Resource Economics, 2008
Posted: 24 Dec 2014
Date Written: December 23, 2008
This study examines legislation that would grant growers termination damages if their contracts are terminated. Our model suggests that, with no contracting frictions, damages would not reduce ex ante efficiency as processors can contract around damages through contract restructuring. Growers would earn less under continuation but would be protected if terminated, although overall expected profits would be unaffected. However, when contracting frictions exist, then efficiency losses can occur as processors would be constrained in restructuring contractual incentives to deal with moral hazard. Growers' expected profits would increase while processors' profits would decrease.
Keywords: contract law, contract regulation, damages, incentives, principal-agent
JEL Classification: Q13
Suggested Citation: Suggested Citation