Spot market versus incentive contract
New Medit, vol 8, n. 3, (September 2009), pp. 12-20
Jel classification: L140, C150
This paper attempts to develop a consistent theory for the choice of performance contracts in agriculture by analyzing the trade-off between quantity and quality and the presence of competence and uncertainty on the basis of the expected utility theory. This theory is able to explain many contract-related issues, such as why the performance contract can be optimal even providing lesser quantity and quality than the spot market and why a trade-off between processors´ and consumer´ interests about mechanism choice can exist, utilizing a simulation exercise.
spot market, incentive contract, moral hazard