Contract Structure, Learning-by-Doing
and the Viability of New Agricultural Industries
Conrad J. Choinière
University of Maryland
To be presented at the
American Agricultural Economics Association Annual Meeting 2002
Abstract: The paper examines contracts in new agricultural industries that exhibit learning-by-
doing. A dynamic model analyzes a contract’s effect on production decisions, as well
as investments in processing capacity and learning. The results of the model are
applied qualitatively to the biomass electricity industry.
Submitted by:
Conrad J. Choinière
Dept. of Agricultural and Resource Economics
University of Maryland
2200 Symons Hall
College Park, MD 20742
Tel: (301) 405-0104
Fax: (301) 314-9091
cchoiniere@arec.umd.edu
1
Introduction
Biobased products and bioenergy offer promising new markets to agricultural producers.
The new industries emerging from these products are likely to exhibit a learning curve in the
early stages of development, i.e. costs of production will decrease over time as producers gain
experience in production. Limitations in the contractual arrangements between growers and
processors, however, may prohibit industries from realizing the full economic benefits accrued
through learning. In particular, the lack of alternative markets for growers, the need for specific
investments and uncertainty in the extent of cost reductions possible through learning-by-doing
limit the efficiency of contractual arrangements between agents. As a result, contracting will
lead to inefficient ex ante investments as compared to the first best and the resulting industry will
realize lower profits than the socially optimal outcome. The reduced level of expected profits
could be a major impediment to the emergence of these new industries.
The paper examines the nature and extent of this potential problem using a multiple
period model of investment and production in a new industry involved with