Department of Agricultural and Resource Economics

Recent theoretical work on agricultural contracts has utilized agency theory. Most of this work considers a moral hazard problem, and assumes that producers are homogeneous, so that there is no adverse selection problem. We utilize a sample of producer performance under a broiler production contract to confirm that heterogeneity exists. We model the principal's decision process and test predictions regarding how heterogeneity will affect the principal's decisions. We attempt to differentiate between symmetric and asymmetric information cases. We find some support for our hypotheses, including evidence that adverse selection may affect the processor's decisions.