Contract design in soybean production

Nandini Ramesh

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: Although there is considerable interest in component pricing of soybeans from both the industry and the academia, it is not commonly observed in the soybean industry. In this thesis, the Principal Agent model is used to design a contract between a processor and grower. The processor provides incentives to growers to produce soybeans with higher components (protein and oil) in them. Under the assumption that growers are risk neutral, a contract is designed where the grower faces all the risk in the production of components. The contract also compensates the grower for the yield drag as a result of production of soybeans with higher components in them. Since there is significant difference in the production of components across regions and year, a diffe-2000. Data from the Iowa Soybean yield trials show that an expected social surplus of {dollar}0.15/bu and {dollar}8.02/acre can be generated through a contract with incentives for components.

Date: 2002-01-01
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