Spot markets for agricultural commodities reveal information about grower quality that contracts can exploit. We show how market prices serve as a form of relative performance evaluation.

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Abstract

We develop a model in which an agricultural spot market serves as a relative performance evaluation device. In this setting, the market price conveys information about factors common to all growers, such as weather, which helps to distinguish the quality of an individual grower’s effort from factors beyond the grower’s control. We derive the optimal contract between a processor and a grower and show that the contract offers the grower partial insurance against market price fluctuations while retaining incentives for effort.

BibTeX

@Article{	  hueth-ligon01,
  author	= {Brent Hueth and Ethan Ligon},
  title		= {Agricultural Markets as Relative Performance Evaluation},
  journal	= {American Journal of Agricultural Economics},
  year		= 2001,
  volume	= 83,
  number	= 2,
  pages		= {318--328}
}