Termination Damages and Relational Contracts

Myoungki Lee and Steven Y. Wu

No 19184, 2005 Annual meeting, July 24-27, Providence, RI from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association)

Abstract: We study the economic impact of proposed legislation requiring processors to pay termination damages to growers when contractual relationships are prematurely severed. In doing so, we derive the optimal relational contract in the presence of asset specificity, ex post market power on the part of processors, and the presence of an exogenous shock that might destroy gains from trade from contracting. The optimal contract then provides a credible framework for assessing how government intervention might affect optimizing behavior of contracting parties. We conclude that termination damages would not be distortionary and would not undermine processors' ability to design effective relational incentives. However, the distribution of surplus would be affected.

Keywords: Agricultural; and; Food; Policy (search for similar items in EconPapers)
Pages: 47
Date: 2005
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea05:19184

DOI: 10.22004/ag.econ.19184

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