Three Essays on the Economics of Specialized Agricultural Products: Equilibrium Contract Structure under Uncertainty and Sunk Costs
Abstract
This dissertation contains three essays exploring how contractual form endogenously responds to uncertainty and irreversibility within a market for specialized agricultural products. It additionally explores the impact that this resulting contractual form has on rent and return distribution along the vertical supply chain. I accomplish this using a novel framework that meshes complete contracting and real options analysis. The first essay explores how equilibrium contract structure between an incumbent buyer and a seller considering entry into production of a specialized agricultural product endogenously responds to uncertainty and irreversibility. Results suggest that contract structure is sensitive to both the level and source of volatility. Additionally, the buyer can more effectively respond to some sources of volatility than others. The second essay relaxes the assumption of an incumbent buyer and examines how the equilibrium contract structure endogenously changes under varying levels of uncertainty and irreversibility when both the buyer and seller are considering entry. The third essay uses the previously mentioned framework to examine cost effectives of existing subsidies aimed at developing the cellulosic biofuel industry. Comparing results from essay’s one and two showcases that contracts offered to seller’s considering production of a specialized agricultural product will vary substantially depending on whether the buying firm offering it is an incumbent or considering entry itself. Incumbent firms have a strategic advantage in being able to offer a contract that transfers a greater amount of risk to themselves while lowering a seller’s premium on entry. Results from essay three indicate that current subsidies designed to develop the cellulosic biofuel industry are not cost effective in their current form and that government resources could be used more efficiently through either establishment subsidies or yearly fixed payments to participants. Additionally, subsidies paid to the plant are generally more effective at inducing entry than payments to the seller.
Degree
Ph.D.
Advisors
Sesmero, Purdue University.
Subject Area
Agricultural economics
Off-Campus Purdue Users:
To access this dissertation, please log in to our
proxy server.