EH.Net Abstracts in Economic History

               EHS Abstract Submission
                    (c) 1997 EH.Net
-----------------------------------------------------------
              Name:  Carolyn Dimitri
               Email:  cdimitri at arec.umd.edu
         Institution:  University of Maryland-College Park  

         Co-author:  None
 
             Title:  Contract Evolution and Institutional
Innovation: The American Fresh Fruit Industry from 1890 to 1930  

  Internet Address
of abstracted work:  Not available on the Internet  

           By mail:  
                     Carolyn Dimitri
                     Department of Agricultural and Resource
Economics
                     University of Maryland
                     College Park MD 20742 USA  

          Language:  English
 
          Abstract:
   An examination of historical evidence in the context of agency
theory provides support for the idea that technological change,
institutional innovation, and economic growth were related in the
American fresh fruit industry.	The innovation of refrigerated
rail transport in the 1880s was the driving force shifting the
American fruit industry from a local system where producers sold
directly to consumers to a national market, where fruit was grown
in regions far from final consumers, with intermediaries
purchasing from farmers and selling to retailers.   Between 1917
and 1930, Congress passed legislation that began what is
currently a government-administered, industry-financed inspection
service.  And by 1930, the Pacific region was producing nearly 40
percent of the nation's deciduous fruit supply.

  Contracts between buyers and sellers in the new national market
were tumultuous, and low fruit quality was the cornerstone in
buyer-seller conflicts.  Low quality in the receiving market was
caused by the unobservable quality of produce the farmer shipped
(adverse selection) ; farmer techniques used in packing fruit and
loading pallets into the rail car (farmer moral hazard); and
railroad methods of handling the fruit, high shipping
temperatures, or by delays en route to the terminal market
(railroad moral hazard).

  The risk of shipping damage plus uncertainty about shipped
quality influenced the kinds of contracts buyers and sellers
would sign.  Two types of contracts existed: fob and consignment.
Prices in the fob contract were based on the grower's report of
shipped quality.  Prices in the consignment contract were based
on the wholesaler's report of delivered quality.  To understand
the contracts, a one-period transaction between a risk-neutral
farmer and risk-neutral wholesaler is modeled in an agency
theoretic framework.  Comparing the equilibria reveals that all
farmers were better off with fob contracts, and that farmers with
low quality fruit were better off than in the first best.
Wholesalers earned zero ex-ante profits in the fob contract, and
positive ex-ante profits in the consignment contract.  The lack
of self-enforcing contracts gave wholesalers some market power,
and, as a result, most fruit sales was sold on consignment.

  In two separate movements, growers in California and Washington
State organized to reduce the effects of farmer and shipper moral
hazard and adverse selection on their profits. By eliminating
quality uncertainty, the reputation of California growers and
quality certification by Washington growers made it possible for
them to enter fob contracts with buyers.  Shortly thereafter,
shipments of Western-grown fruit to Eastern markets rapidly
increased.  Eastern apple growers, in particular, were affected
by the influx of high quality Western-grown fruit into their
region, and tried unsuccessfully to organize.  This failure led
Eastern growers to urge Congress to intervene (1909).
Legislation specific to apple marketing was passed.  Later
(1917-1922), Congress passed legislation creating two inspection
services for all fruit,  one in the receiving market and the
other at the shipping point.  The inspections enforced contracts
by making it possible to verify quality at each end of the
marketing chain, causing a universal shift to fob contracts.
Fruit production in the Pacific increased 58 percent between 1909
and 1929, relative to a 4 percent increase in national fruit
production.


      Bibliography:  Dimitri, Carolyn. "Contract Evolution and
Institutional Innovation: The American Fresh Fruit Industry from
1890 to 1930." Paper prepared for presentation at the Cliometric
Society-sponsored ASSA Session "Growth and Institutions," January
3, 1998.
 
                  Subject:  A
 Geographical Area:  7
      Country/Region:  USA
           Time Period:  8
 
 -------------------------------------------------------  
Visit the library of Abstracts in Economic History or  submit
your abstract at: http://www.eh.net/AEH