Do Contracting Incentives Matter?

Agency theory explanations for agricultural contract designs are often observationally equivalent to perfect information explanations. Further in order to test properly the hypothesis that moral hazard is important one must first test and accept the hypothesis that agents respond to contract incentives. If agents do not respond to contract incentives then it is unlikely that moral hazard is significant. Accordingly we move beyond contract design and focus on whether or not we can reject the hypothesis that moral hazard is important by examining growers responses to price incentives for processing tomato quality. We utilize a natural experiment. In our data set growers deliver processing tomatoes under a price incentives contract and for a fixed price per ton. We compare the quality of the tomatoes delivered under the two arrangements. Our results suggest that growers indeed do respond to price incentives by improving tomato quality