Quality Differences and Risk Shifting Associated with Alternative Marketing Arrangements in the Swine Industry

We analyze quality differences in market hogs across alternative procurement methods. The test results show that alternative marketing (procurement) channels generate hogs of statistically different quality. However, the quality ordering of alternative marketing arrangements is not unique, but varies across quality attributes, and the quality differences do not appear to be economically significant. We examine the relationship between alternative procurement methods for live hogs and the quality of the resulting pork products. The correlation coefficient between the non-spot market purchases of live hogs and the Hicks’ composite quality index for pork products is positive and significant, but the magnitude of that effect is small. Finally, we show that different types of marketing arrangements exhibit different price volatilities, subjecting the producers selling their hogs through these channels to different levels of risk.Livestock Production/Industries, Marketing,

Homogenous and Heterogenous Contestants in Piece Rate Tournaments: Theory and Empirical Analysis

In this paper we show that sorting different ability contestants in piece rate tournaments into more homogeneous groups alters incentives for agents to exert effort. In particular we show that for a given mean of the tournament group's ability parameters, larger variance (more heterogeneous agents) induces higher optimal effort. This implies that the principal can actually gain from heterogenizing the tournament groups. On the other hand, the effect of this change on growers' welfare is unclear because higher effort leads to higher productivity and hence higher payment, but also increases the cost of effort. Using broiler production contracts settlement data we empirically estimate a fully structural model of a piece rate tournament game with heterogeneous players. Our counterfactual analysis shows that under reasonable assumptions the integrator's gain is actually larger than the growers' losses indicating that heterogenizing groups in piece rate tournaments may be efficient.Research Methods/ Statistical Methods,

REGULATING BROILER CONTRACTS: TOURNAMENTS VERSUS FIXED PERFORMANCE STANDARDS

Grower discontent with tournaments as mechanisms for settling poultry contracts can largely be attributed to the group composition risk that tournaments impose on growers. This paper focuses on the welfare effects of a widely advocated regulatory proposal to prevent integrator companies from using tournaments and replace them with schemes that compare performance to a fixed standard. The analysis shows that whereas the mandatory replacement of tournaments with fixed performance standards, absent any other rules, can decrease grower income insurance without raising welfare, replacing tournaments with fixed performance standards can simultaneously increase income insurance and welfare, provided that the piece rate is correctly specified.Industrial Organization, Livestock Production/Industries,

Optimal Incentives under Moral Hazard and Heterogeneous Agents: Evidence from Production Contracts Data

The objective of this paper is to develop an analytical framework for estimation of the parameters of a structural model of an incentive contract under moral hazard, taking into account agents heterogeneity in preferences. We show that allowing the principal to strategically distribute the production inputs across heterogenous agents as part of the contract design, the principal is able to change what appears to be a uniform contract into individualized contracts tailored to fit agents' preferences or characteristics. Using micro level data on swine production contract settlements, we find that contracting farmers are heterogenous with respect to their risk aversion and that this heterogeneity affects the principal's allocation of production inputs across farmers. Relying on the identifying assumption that contracts are optimal, we obtain the estimates of a lower and an upper bound of agents' reservation utilities. We show that farmers with higher risk aversion have lower outside opportunities because of lower reservation utilities.Agency Contracts, Optimal Incentives, Moral Hazard, Risk Aversion, Heterogeneity, Production Economics, D82, L24, Q12, K32, L51,

Incentives to Invest in Short-term vs. Long-term Contracts: Evidence from a Natural Experiment

In this paper we study the effects of the change in contract length on the agents' incentives to invest and exert effort. We present an agent's dynamic decision model that explicitly deals with two types of investments and directly allows for contract regime switching by varying the probability of contract renewal parameter. The fact that the unobservable investment in human capital is complementary with the agent's effort produces a result that increasing the probability of contract renewal increases investment and effort, with the consequent increase in production. We also show that there exists a specific level of investment in human capital, for which the investment in physical capital is profitable. We test these theoretical predictions using contract settlement data for the production of hatching eggs. The data was generated by a natural experiment where during the period covered by the data the contract had changed from short-term to long-term. The obtained empirical results are largely supportive of the developed theory.

Incentives to Invest in Short-term vs. Long-term Contracts: Evidence from a Natural Experiment

In this paper we study the effects of the change in contract length on the agents' incentives to invest and exert effort. We present an agent's dynamic decision model that explicitly deals with two types of investments and directly allows for contract regime switching by varying the probability of contract renewal parameter. The fact that the unobservable investment in human capital is complementary with the agent's effort produces a result that increasing the probability of contract renewal increases investment and effort, with the consequent increase in production. We also show that there exists a specific level of investment in human capital, for which the investment in physical capital is profitable. We test these theoretical predictions using contract settlement data for the production of hatching eggs. The data was generated by a natural experiment where during the period covered by the data the contract had changed from short-term to long-term. The obtained empirical results are largely supportive of the developed theory

Using the age-based insurance eligibility criterion to estimate moral hazard in medical care consumption

This paper uses fuzzy regression discontinuity design to estimate the moral hazard effect in health care consumption in the population of young adults. We use invoice data for outpatient hospital services from a regional hospital in Croatia.The estimation is complicated by the fact that the data set consists only of users of medical services, which would tend to underestimate the moral hazard effect. To address this issue we use a modified version of the instrumental variables approach.We find a 92% reduction in the number of hospital visits for individuals who lost insurance coverage when crossing the 18th birthday threshold

Structural Estimation of Rank-Order Tournament Games with Private Information

In this paper we propose a game-theoretic model of a rank-order tournament with private information and characterize its equilibrium solution. The model captures many important features of the production contracts once observed in the poultry industry. We use the contract settlement data from a poultry company who used rank-order tournaments to remunerate their contract growers and estimate a fully structural model of a symmetric Nash-equilibrium of this game. We show that growers' equilibrium effort depends on three factors: the spread in piece rates between the performance brackets, the number of players in each tournament, and the number of performance brackets used. We use the estimates of the productivity shocks density to simulate how changes in these three tournament characteristics affect the total welfare and the distribution of welfare between the growers and the integrator.Research Methods/ Statistical Methods,