Incentive provision and coordination costs in food marketing channels: A multi-stage channel agency theory perspective

Food-supply chains have become extensively vertically coordinated through the use of contracts as an organizational response to satisfy the needs of consumers in the saturated food markets of the industrialized countries. The contracts involved must establish an optimal trade-off between incentive provision and risk reduction. Agency theory can be used to model this trade-off. We show how to do this in a three-stage (producer, wholesaler, retailer) principal-agent supply-chain model. Its application to the Dutch supply chain of ware potatoes shows that during the period 1961–2002, retailers have been able to provide more incentives to the wholesalers and producers and as a consequence the costs of coordination in the supply chain decreased. Food-supply chains are facing a transition from using open-market mechanisms for coordinating the various stages of value-adding (e.g., produc-tion, wholesale, retail) to negotiated coordination involving governance forms such as alliances, joint ventures, contracts, franchising agreements, and vertical integration (e.g., Boehlje, Hoffing, and Schroeder 1999). A driving force behind this integra