Balancing Grower Protection Against Agency Concerns: An Economic Analysis of Contract Termination Damages
By: Lee, Myoungki; Wu, Steven Y.; Fan, Maoyong
Lee, Myoungki; Wu, Steven Y.; Fan, Maoyong, Balancing Grower Protection Against Agency Concerns: An Economic Analysis of Contract Termination Damages, Journal of Agricultural and Resource Economics, Volume 33, Issue 2, August 2008, Pages 154-168
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 friction 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' profit would decrease.