Integrator Contracts with Many Agents and Bankruptcy

Abstract

This article analyzes optimal livestock production contracts between an integrator company and many independent growers in three similar industries: broiler, turkey, and swine. The analysis provides an explanation for the simultaneous existence of distinct incentive schemes in these industries by examining the effects of bankruptcy. The key factors are shown to be the output price volatility and the firm size. With large companies dominating the broiler industry, a small price volatility facilitates the use of two‐part piece rate tournaments. By contrast, given the prevalence of smaller companies in the swine industry, a larger price volatility generates a bankruptcy risk which renders the use of tournaments infeasible. Given the combination of medium‐size companies in the turkey industry, an intermediate price volatility produces a mixed result where tournaments and fixed performance standards exist simultaneously.