Contract production of peas

This article analyzes a contract between farmers and the processor, Danisco Foods. Production of peas for consumption requires highly accurate coordination, obtained through centralized decision-making. The contract is based on a tournament system, providing risk sharing between the farmers. General problems known from contract theory such as hold-up, moral hazard, risk sharing, and discrimination are analyzed. The article illustrates trade-offs between these problems in the design of contracts. By negotiating the contract through The Pea Growers' Association, the farmers gain some bargaining power. Thereby, the farmers ensure that Danisco Foods uses only one contract for all farmers. This article analyzes the consequences of the farmers' strategy. Throughout the analysis, several modifications of the contract are suggested in order to improve the incentives. (C) 2003 Elsevier Science Ltd. All rights reserved.