Organization Department of Agricultural Economics, Purdue University, West Lafayette, USA.

Year 2010

As dairy farms grow and specialize in milking cows, raising replacement heifers is increasingly outsourced. Perhaps the largest challenge of outsourcing the heifer enterprise involves quality, measured as milk production potential, and the possibility for moral hazard due to hidden action on the part of the custom heifer grower. A principal-agent framework was used to elicit contract terms to provide incentives for the heifer grower to achieve desired growth rates, and enable the return of the heifer to the dairy farm on an accelerated time frame, without sacrificing quality. To mitigate incentive asymmetries, bonuses and deductions are proposed.