Journal Article

Simulating the Impacts of Contract Supplies in a Spot Market-Contract Market Equilibrium Setting

Yanguo Wang and Edward C. Jaenicke

in American Journal of Agricultural Economics

Published on behalf of Agricultural and Applied Economics Association

Volume 88, issue 4, pages 1062-1077
Published in print November 2006 | ISSN: 0002-9092
Published online November 2006 | e-ISSN: 1467-8276 | DOI: http://dx.doi.org/10.1111/j.1467-8276.2006.00916.x
Simulating the Impacts of Contract Supplies in a Spot Market-Contract Market Equilibrium Setting

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This article embeds a principal-agent model within a market equilibrium model of contract and cash markets to analyze the impact of contracting on the spot market for hogs. The equilibrium model incorporates both quality differentiation in the contract market and an endogenously determined cash market price. For three types of contracting scenarios, market equilibrium conditions are derived, and results are presented for a numerical example. Contrary to some empirical results, our model shows that the increased supply of hogs under typical formula-price contracts can increase or decrease the cash market price, depending on the relative size of overall contract supplies.

Keywords: captive supplies; contracts; equilibrium models; principal-agent models; D820; D860

Journal Article.  8309 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy

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