Review of Industrial Organization 23: 267–282, 2003.
© 2004 Kluwer Academic Publishers. Printed in the Netherlands.
Contracts and Quality in the California Winegrape
RACHAEL E. GOODHUE
, DALE M. HEIEN, HYUNOK LEE and DANIEL
Department of Agricultural and Resource Economics, University of California, Davis, One Shields
Avenue, Davis, CA 95616, U.S.A.
Abstract. We analyze the relationship between product quality and contracting choices using the
results of a survey of California winegrape growers. Growers who produce high-quality grapes are
more likely to use formal written contracts than are growers who produce low-quality grapes. Writ-
ten contracts for high-quality grapes are more likely to include provisions regarding the production
process, while written contracts for low-quality grapes are more likely to include explicit ﬁnancial
incentives for sugar content and other product attributes.
Key words: Contract choice, contract design, quality, wine
Product quality is an important consideration in many industries. Often, quality
is dependent upon the characteristics of inputs obtained from suppliers. Protect-
ing product quality has been identiﬁed as a motivation for vertical coordination.
Vertical coordination encompasses a variety of arrangements, from simple oral
agreements, to formal written contracts, to common management of neighbor-
ing stages in the production chain. LaFontaine and Slade (1998) identify three
areas in which most applied contracting research has occurred: executive com-
pensation, franchise contracting (including sales force contracting), and industrial
procurement. Our study is in a fourth area: agricultural contracts.
Stiglitz (1974) examined sharecropping in an early contribution to the applied
contracting literature. Shaban (1987) used data on sharecropped and owned land to
test the predictions of agency theory regarding agent effort. Allen and Lueck (2002)
examined the determinants of sharecropping, and the determinants of sharecrop
contract terms. Contracts between farmers and agricultural processors have been
important in broiler chicken production, and in fruit and vegetable production for
many years, and are becoming increasingly important in other commodities. This
literature is primarily composed of theoretical work, work that relies on interviews,
case studies, and other informal empirical evidence, and work that uses simulation
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