This article examines the structure of contractual relations between growers and first handlers in California fruit and vegetable markets. Evidence on existing structures is collected from on‐site interviews and from a small mail survey of market intermediaries who contract with independent growers. Four generic instruments are identified—input control, field visits, quality measurement, and residual price risk—which are used to coordinate relations between growers and first handlers and which help to alleviate information asymmetries and align incentives between contracting parties. Drawing from our interviews and survey, we offer examples of how each of these instruments are employed.

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This paper surveys some recent developments in contract theory and illustrates how this theory might be useful for conceptualising policy issues related to vertical coordination and contracting in the agro-food industry. The article begins by surveying contract theory to identify key economic distortions that can potentially justify government involvement. Next, the general ingredients of agricultural contracts that are most likely to create inefficiencies are discussed. Finally, controversial aspects of real-world agricultural contracts are highlighted and lessons from the theory are used to determine whether government intervention is justified. Actual legislation that has been proposed in the USA is analysed where appropriate and topics that await further research are also discussed.