Producer Protection Legislation and Termination Damages in the Presence of Contracting Frictions

Abstract

This study models producer protection legislation (PPL) that would grant growers the right to claim damages if their contracts are prematurely terminated. In the absence of contracting frictions that prevent contractors from redesigning contracts to accommodate exogenous policy changes, producer protection legislation damages (PPLD) would not be distortionary or redistributive. If contracting frictions exist, then PPLD would have efficiency and redistributive effects, though the direction and magnitude depends on the size of PPL damages vis‐à‐vis expected damages under existing contract law. This study clarifies the conditions under which PPLD would decrease efficiency and protect growers.

Keywords: agricultural contracts, breach damages, contract law, incentives, moral hazard, producer protection act, vertical coordination