Balancing Grower Protection Against Agency Concerns: An Economic Analysis of Contract Termination Damages

Journal of Agricultural and Resource Economics, 2008

Posted: 24 Dec 2014

See all articles by Myoungki Lee

Myoungki Lee

Independent

Steven Y. Wu

Purdue University - College of Agriculture; IZA Institute of Labor Economics

Maoyong Fan

Ball State University - Department of Economics

Date Written: December 23, 2008

Abstract

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

Lee, Myoungki and Wu, Steven Y. and Fan, Maoyong, Balancing Grower Protection Against Agency Concerns: An Economic Analysis of Contract Termination Damages (December 23, 2008). Journal of Agricultural and Resource Economics, 2008. Available at SSRN: https://ssrn.com/abstract=2542340

Myoungki Lee

Independent ( email )

Steven Y. Wu

Purdue University - College of Agriculture ( email )

United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Maoyong Fan (Contact Author)

Ball State University - Department of Economics ( email )

Whitinger Business Building, room 201
2000 W. University Ave.
Muncie, IN 47306-0340
United States
765-285-5741 (Phone)

HOME PAGE: http://https://sites.google.com/site/maoyongfan/home

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