Interactions Between Incentive Instruments: Contracts and Quality in Processing Tomatoes

Abstract

Contracting and other forms of vertical coordination are important parts of the supply chains for many agricultural products. Often the buyer cares about multiple product attributes affected by a grower's actions. Using data that are insulated from common methodological problems, we test whether or not price incentives for two processing tomato quality attributes exhibit complementarity in improving delivered quality. Price incentives for the two attributes are substitutes for the provision of one and complements for the other. This finding has consequences for the profit‐maximizing choice of incentive instruments for processors, and contributes to the literature regarding tests for complementarities.

Farmer perceptions of risk in 2017

“…This large difference in mean enterprise size likely reflects the differences in processing and fresh tomato production. The commercial production of processing tomatoes account for nearly 90% of production and are nearly exclusively produced under contract—about 97% (Goodhue, Mohapatra, & Rausser, ; Schieffer & Vassalos, ).…”

Food Quality: The Design of Incentive Contracts

“…Several studies have used proprietary data regarding quality outcomes and contract provisions from either the California Tomato Growers Association (a bargaining group) or a tomato processor. Overall, the studies conclude that growers do respond to financial incentives for specific quality incentives (Hueth & Ligon 2002Wu 2005;Alexander et al 2007;Goodhue et al 2010). The exception is net soluble sugars.…”

“…Consequently, interactions among the effects of these provisions are an important consideration for the processor (Holmstrom & Milgrom 1991, 1994Hart et al 1997). Goodhue et al (2010) test for complementarity between the effects of financial incentive provisions for two tomato quality attributes, material other than tomatoes (e.g., stems or dirt) and limited-use (overripe) tomatoes, on the delivered level of those and other undesirable attributes. They find that the two provisions are substitutes for reducing material other than tomatoes and other attributes and are complements for reducing limited-use tomatoes.…”

Contract farming and smallholder incentives to produce high quality: experimental evidence from the Vietnamese dairy sector

“…The available literature on contracts in agriculture focuses mainly on two questions: first, what determines contract choice (Ghatak and Pandey, 2000;Goodhue et al, 2004;Masakure and Henson, 2005) and second, how do specific contract designs affect farmers' response once they have been contracted by a buyer (Hueth et al, 1999;Goodhue et al, 2010)? The second question has mostly been addressed in developed countries.…”