Marketing Agreement, Food Safety and Contract Design

Recent outbreaks of food-borne illness related to fruit and vegetables have led to increased concerns about the safety of produce. In response, the industry has adopted marketing agreements to ensure consistency of product safety. Contracts now are widely used between processors and growers to specify product safety attributes. This paper uses a principal-agent model to examine how the inclusion of a marketing agreement influences the behavior of growers and processors under processor-grower contracts. We conclude that: (1) the processor offers a contract with a higher premium and a lower base payment under the contract with a marketing agreement (2) contract parameters change in similar manner under the two contracts (3) under a contract with a marketing agreement the processor earns less profit. The individual contract scenarios are discussed in detail.