Contractual arrangements are a very common form of governance in agri-food chains. Contracts are used to coordinate production and distribution of agricultural products and inputs in many sectors, of which some examples are in broiler and in pork. In this article, we apply a model of relational contract between two Danish pork producers. When designing relational contracts such as this partnership between Farmers N
and J, it is usually based on budgets that are rather static based on assumptions
regarding average prices and cost levels. To fit into the adaptation framework, we
made dynamic budgets showing the payoffs to both parties at various states and with
different actual decisions taken after each state was revealed. This exercise in itself
seems to be rather valuable. It provides not only insight to the profit accruing to each
party given their expectations but also induces the parties to have a detailed
discussion on how allocation of the decision rights affects the potential outcome.
Regarding the specific case, we found that they have allocated decision rights in
such a manner that actual decisions on quality will be taken to protect the relation
and maximize the total shared profit.