Contract Production of Green Peas

This paper analyzes a contract between farmers and a large company in the Danish food industry, Danisco Foods. Production of green peas requires a very accurate coordination, which is obtained through centralized decision-making. The contract is based on a tournament system providing risk sharing between the farmers. General problems from the contract theory such as hold up, moral hazard, risk sharing and screening are analyzed. The paper illustrates the tradeoffs between these problems in design of contracts. By negotiating the contract through a pea-growers association, the farmers gain some bargaining power. Thus the farmers can ensure that Danisco Foods uses only one contract for all farmers. This paper analyzes the consequences of the farmers' strategy. Throughout the analysis several modifications of the contract is suggested in order to improve the incentives.