How does contracting change a farmer's supply response to price changes? When intermediaries absorb risk and farmers have private information, supply response is dampened relative to spot-market farming.

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Abstract

We consider four environments in which agricultural producers might operate, studying the role of price and production risk in shaping farmers’ supply-response decisions. In the first two environments, farmers market their own produce and are risk neutral and risk averse, respectively. In the third, farmers are risk averse, but risk neutral intermediation predicts that farmers should not face any production or price risk. In the final environment, risk neutral intermediation continues but the possibility of private information for farmers is admitted, which rationalizes exposure to production and price risk and suggests that a farmer’s response to a change in expected price will be less pronounced than in other environments.

BibTeX

@Article{	  hueth-ligon99a,
  author	= {Brent Hueth and Ethan Ligon},
  title		= {Agricultural Supply Response Under Contract},
  journal	= {American Journal of Agricultural Economics},
  year		= 1999,
  volume	= 81,
  number	= 3,
  pages		= {610--615}
}