Do Transaction Costs and Risk Preferences Influence Marketing Arrangements in the Illinois Hog Industry

Abstract

Studies of hog industry structure often invoke risk reduction and transaction costs explanations for empirical observations, but fail to directly examine the relevant transaction attributes. This study employs unique survey and accounting data to explain Illinois producers' marketing arrangements by transaction attributes and preferences for price risk. Factor analytic methods limit the error in measurement of indirectly observable risk and transaction costs variables. Logit and covariance structural models explain contract and spot use, while Poisson count regressions explain contract duration. Results support the importance of producers' risk preferences and investments in specific assets as explanations for the choice of marketing arrangements. In particular, related investments in specific hog genetics and specific human capital regarding the production process increase the probability of selecting long-term contracts over spot markets, while investments in specific equipment or facilities lengthen contract duration. Producers who perceive greater levels of price risk and/or are more averse to it appear more (less) likely to use long-term contracts (spot markets), and hence, to make such investments.