Why don't contracts fully insure growers against price risk? Because price conveys information about quality that direct measurement misses, so efficient contracts leave growers exposed to some price risk.

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Abstract

Risk-averse farmers in the produce industry grow a product whose market price is often quite unpredictable. Shippers or other intermediaries shield the farmer from much of this price risk; however, actual contracts between growers and shippers vary considerably across commodities in the residual price risk growers face. We hypothesize that imperfect quality measurement results in a moral hazard problem, and that price provides additional information regarding quality. As a consequence, an efficient contract does not shield growers from all idiosyncratic price risk.

BibTeX

@Article{	  hueth-ligon99b,
  author	= {Brent Hueth and Ethan Ligon},
  title		= {Producer Price Risk and Quality Measurement},
  journal	= {American Journal of Agricultural Economics},
  year		= 1999,
  volume	= 81,
  number	= 3,
  pages		= {512--524}
}