Progress 10/01/05 to 09/30/11
Outputs
OUTPUTS: This project produced the following outputs: Events: the research findings from this project were presented at 15 natonal and international conferences and 4 university workshops. Activities: the research findings from this project was used as teaching materials in the Ph.D. course on Empirical Methods in Industrial Organization at North Carolina State University. Products: a method to estimate piece rate tournament models; a method to estimate rank-order tournament models; a method to quantify the importance of trade costs; a method to estimate the optimal number of bidders for an auction; a method to model and estimate both the entry and the bidding decisions of a bidder in an auction; a method to infer whether farmers value environemnt from their participation decisions in the conservation reserve program; a method to test whether the use of alternative marketing arrangements increases the market power of packers in the livestock industry. The outputs have been disseminated to the academic community through journal publications. PARTICIPANTS: Not relevant to this project. TARGET AUDIENCES: Target audiences of this project include the academic community and Ph.D. level graduate students. Research outputs were disseminated to them through journal publications and classroom instruction. PROJECT MODIFICATIONS: Not relevant to this project.
Impacts
Outcomes/Impacts of this project mainly take the form of change in knowledge. Due to the space limit, below I describe the outcomes/impacts of one particular publication resulting from this project as an example. In Kandilov and Zheng (2011), we show that entry and adjustment costs for U.S. exports of meat, fish, and sugar to developed markets are much lower than such costs for these exports to developing nations. U.S. exports of cereals, on the other hand, face smaller entry and adjustment costs into both developed and developing markets. These findings allow trade policymakers to identify which specific agricultural commodities they should help regarding export activities and which markets they should help them with. With the knowledge from this research, we expect policymakers will try to use their limited resources more wisely and boost export activities of certain agricultural commodities and expand the exports of US agricultural products to more markets in the world. From our calculations, we expect these improvements in exports will increase the demand for US agricultural products and hence drive up the prices for such commodities. This in turn will increase farmers' (both in North Carolina and the U.S. as a whole) revenue by millions of dollars. With higher income, farmers will purchase more other products. As a result, owners and workers of other industries will also benefit in terms of higher wages and more job security.
Publications
- Vukina, T. and Zheng, X. (2007): Structural Estimation of Rank-Order Tournaments with Private Information, American Journal of Agricultural Economics, 89, 3, 651-664.
- Zheng, X. and Vukina, T. (2007): Efficiency Gains from Organizational Innovation: Comparing Ordinal and Cardinal Tournament Games in Broiler Contracts, International Journal of Industrial Organization, 25, 4, 843-859.
- Vukina, T. and Zheng, X. (2011): Homogenous and Heterogeneous Contestants in Piece Rate Tournaments: Theory and Empirical Analysis, Journal of Business and Economic Statistics, 29, 4, 506-517.
- Kandilov, I. and Zheng, X.(2011): The Importance of Entry and Adjustment Costs in International Agricultural Markets, Agricultural Economics, 42, 5, 531-546.
- Vukina, T. and Zheng, X. (2010): Can Bargaining Theory Explain the Price Dispersion Puzzle Evidence from an Agricultural Market, Agricultural and Resource Economics Review, 39, 3, 534-546.
- Li, T. and Zheng, X.(2009): Entry and Competition Effects in First-Price Auctions: Theory and Evidence from Procurement Auctions, Review of Economic Studies, 76, 4, 1397-1429.
- Zheng, X. (2009): Quantifying the Cost of Excess Market Thickness in Timber Sale Auctions, International Journal of Industrial Organization, 27, 5, 553-566.
- Zheng, X. and Vukina, T. (2009): Do Alternative Marketing Arrangements Increase Pork Packers' Market Power American Journal of Agricultural Economics, 91, 1, 250-263.
- Vukina, T., Shin, C. and Zheng, X. (2009): Complementarity among Alternative Procurement Arrangements in the Pork Packing Industry, Journal of Agricultural & Food Industrial Organization, 7, Article 1.
- Vukina, T., Zheng, X., Marra, M. and Levy, A. (2008): Do Farmers Value The Environment Evidence from a Conservation Reserve Program Auction, International Journal of Industrial Organization, 26, 6, 1323-1332.
- Zheng, X., Vukina, T. and Shin, C. (2008): The Role of Farmers' Risk Aversion for Contract Choice in the US Hog Industry, Journal of Agricultural & Food Industrial Organization, 6, Article 4.
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Progress 10/01/09 to 09/30/10
Outputs
OUTPUTS: Conferences Econometric Society World Congress, Shanghai, China, August 2010. Sumer Workshop in Industrial Organization and Management Strategy, Shanghai, China, August 2010. Summer Workshop in Game Theory and Mechanism Design, Hangzhou, China, August 2010. Workshop Iowa State University, October 2009. Teaching Taught Ph.D. level class empirical methods in industrial organization in Spring 2010. Enrollment, 9 students. Mentoring Adivised 7 students who are working on their Ph.D. dissertations. Student Graduated 1 student (I serve as the dissertation committee co-chair) defensed in August 2010. PARTICIPANTS: Nothing significant to report during this reporting period. TARGET AUDIENCES: Nothing significant to report during this reporting period. PROJECT MODIFICATIONS: Nothing significant to report during this reporting period.
Impacts
Change in Knowledge In a recent paper, my coauthor and I find that sorting different ability contestants in piece rate tournaments for growing chickens into more homogenous groups alters incentives for agents to exert effort. In particular we show that for a given mean of the tournament groups ability parameters, larger variance or more heterogenous agents induces higher optimal effort. This implies that the principal or the poultry company can actually gain from heterogenizing the tournament groups. On the other hand, the effect of this change on agents welfare is unclear because higher effort leads to higher productivity and hence higher payment, but also increases the cost of effort. We then propose a method to structurally estimate this piece rate tournament game with heterogenous players and apply it to a broiler production contracts settlement data set. Our counterfactual analysis shows that under reasonable assumptions the principals gain is actually larger than the agents losses indicating that heterogenizing groups in piece rate tournaments may be efficient or social welfare improving.
Publications
- Li, T. and X. Zheng 2009 Entry and Competition Effects in First-Price Auctions Theory and Evidence from Procurement Auctions, Review of Economic Studies, 76, 4, 1397-1429.
- Zheng, X. and D. M. Zimmer 2009 Racial Differences in Health Care Utilization Analysis by Intensity of Demand, Contemporary Economic Policy, 27, 4, 475-490.
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Progress 10/01/08 to 09/30/09
Outputs
OUTPUTS: Activities: a. Teaching: Taught Empirical Methods in Industrial Organization at NC State in Spring 2009, 7 students b. Mentoring: Served on 6 dissertation committees. Events: a. Invited Seminars and International Conference Presentations: Iowa State University, Ames, IA, October 2009. Agricultural & Applied Economics Association Annual Meeting, Milwaukee, WI, July 2009. Summer Workshop in Industrial Organization and Management Strategy, Beijing, China, June 2009. Zhejiang University, Hangzhou, China, June 2009. Services: Consulting: to RTI International on the project Measuring Consumption Response to Prices in a Dynamic Model of Consumer Food Purchase Behavior. Products: a. Models: empirical piece rate tournament models b. Methods: structural estimation method for piece rate tournament models. PARTICIPANTS: Nothing significant to report during this reporting period. TARGET AUDIENCES: Nothing significant to report during this reporting period. PROJECT MODIFICATIONS: Nothing significant to report during this reporting period.
Impacts
Change in Knowledge: One of the most important characteristics of modern agriculture in the U.S. is the increasing use of various alternative marketing arrangements (AMAs). More than 36 percent of U.S. agricultural products are now marketed through marketing contracts and production contracts and AMAs are now used in crops, fruits, vegetables, wine grapes, tobacco, and livestock. The AMAs bring farmers two major benefits. First, they help farmers manage risks (especially the price risk) better. Second, they can reduce farmers transaction cost by providing an adequate market access. There are also problems with the use of AMAs. When the packer or processor controls more and more of the supply in the industry through production contracts, oligopsony issues may become a concern. Another market failure that may justify the government regulation of AMAs is the problem of hold up, which leads to the underinvestment of capital. Despite the fact that the scientific support for government regulation in both theoretical and empirical literature is rather weak, the pressure on both federal and state legislatures to regulate AMAs, especially in the livestock sector, is mounting. There are two types of regulatory requests. One is coming from the increasing number of dissatisfied contract growers (mainly in the poultry industry) to place some legal constraints on the type of contracts integrators and growers can sign. A legislation proposal called the Producer Protection Act is advocated by 16 State Attorneys General and a similar bill has been introduced in the U.S. Senate by Senator Harkin. A second type of regulation being pushed by independent farmers (mainly in the cattle industry but more recently in the hog industry as well) would essentially ban production contracts or any other type of packer ownership of animals outright. The concerns about the effects of captive supplies on cattle prices culminated in legislation proposed as part of the 2002 Farm Bill (subsequently omitted) to ban most packer ownership of cattle. As recently as April 2005, senators Grassley, Harkin, and others introduced another bill that would make it unlawful for packers to own, feed, or control livestock intended for slaughter. We (Dr. Dan Phaneuf, Dr. Tom Vukina, Ph.D. student Wu-Yueh Hu and I) contribute to the debate by conducting a careful empirical analysis to quantify the benefits to farmers from the use of AMAs. This study is funded by a USDA grant. Our results show that AMAs yield economically significant level of benefits to farmers who rely on them to market their outputs and banning them would yield substantial welfare loss for these farmers. For example, The benefit of using marketing contracts to corn producers is $290 million, to soybean producers is $127 million and to wheat producers is $40 million, respectively on an annual basis.
Publications
- 1.Zheng, X. 2009, Quantifying the Cost of Excess Market Thickness in Timber Sale Auctions, International Journal of Industrial Organization, 27, 5, 553-566 (Lead Article).
- 2.Li, T. and X. Zheng 2009, Entry and Competition Effects in First-Price Auctions: Theory and Evidence from Procurement Auctions, Review of Economic Studies, 76, 4, 1397-1429.
- 3.Zheng, X. and D. M. Zimmer 2009, Modeling Bivariate Count Distributions with Finite Mixture Models: Application to Health Care Demand for Married Couples, Applied Economics, in press.
- 4.Zheng, X. and D. M. Zimmer 2009, Racial Differences in Health Care Utilization: Analysis by Intensity of Demand, Contemporary Economic Policy, 27, 4, 475-490.
- 5.Vukina, T., C. Shin and X. Zheng 2009, Complementarity among Alternative Procurement Arrangements in the Pork Packing Industry, Journal of Agricultural & Food Industrial Organization, 7, Article 3.
- 6.Zheng, X. and T. Vukina (2009), Do Alternative Marketing Arrangements Increase Pork Packers' Market Power American Journal of Agricultural Economics, 91, 1, 250-263.
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Progress 10/01/07 to 09/30/08
Outputs
OUTPUTS: During 10/01/2007 to 09/30/2008, my research efforts focus on measuring the entry and adjustment costs of international trade of agricultural products. The methodology used is the new empirical Industrial Organization structural approach as originally proposed in this project. Such efforts have resulted in one research article: "The Importance of Entry and Adjustment Costs in International Agricultural Markets," joint with Ivan Kandilov. It is currently under review for publication at American Journal of Agricultural Economics. A revision is requested by the editor. In this paper, we show that entry and adjustment costs for U.S. exports of meat, fish, and sugar to developed markets are much lower than such costs for these exports to developing nations. U.S. exports of cereals, on the other hand, face smaller entry and adjustment costs into both developed and developing markets. These findings allow trade policymakers to identify which specific agricultral commdoities they should help regarding export activities and which markets they should help them with. Therefore, their policies will be more targeted and the limited resources will be better allocated. PARTICIPANTS: Nothing significant to report during this reporting period. TARGET AUDIENCES: US trade policy makers PROJECT MODIFICATIONS: Nothing significant to report during this reporting period.
Impacts
We plan to convey our research findings to US trade policymakers and USDA in particular through publications and extension services. With the knowledge from this article, we expect policymakers will try to use their limited resources more wisely and boost export activities of certain agricultural commodities and expand the exports of US agricultural products to more markets in the world. From our calculations, we expect these improvements in exports will increase the demand for US agricultural products and hence drive up the prices for such commodities. This in turn will increase farmers' (both in North Carolina and the U.S. as a whole) revenue by millions of dollars. With higher income, farmers will purchase more other products. As a result, owners and workers of other industries will also benefit in terms of higher wages and more job security.
Publications
- 1. Zheng, X. and T. Vukina(2009): Do Alternative Marketing Arrangements Increase Pork Packers' Market Power American Journal of Agricultural Economics, forthcoming.
- 2. Zheng, X. and D. M. Zimmer (2009): Racial Differences in Health Care Utilization: Analysis by Intensity of Demand, Contemporary Economic Policy, forthcoming.
- 3. Vukina, T., X. Zheng, M. Marra and A. Levy (2008): Do Farmers Value The Environment Evidence from a Conservation Reserve Program Auction, International Journal of Industrial Organization, 26, 6, 1323-1332.
- 4. Zheng, X., T. Vukina, and C. Shin (2008): The Role of Farmers' Risk Aversion for Contract Choice in the US Hog Industry, Journal of Agricultural & Food Industrial Organization, 6, Article 4.
- 5. Zheng, X. (2008): Semiparametric Bayesian Estimation of Mixed Count Regression Models, Economics Letters, 100, 3, 435-438.
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Progress 10/01/06 to 09/30/07
Outputs
OUTPUTS: During 10/01/2006 to 09/30/2007, my research efforts focus on the optimal use of production contracts used by poultry and vegatable companies to procure growing services from the farmers. The methodology used is the new empirical Industrial Organization structural approach as originally proposed in this project. Such efforts have resulted in two research articles, both of which are currently under review for publication at leading economic journals. The findings from these articles can be used by firms to imporve their production organization mechanisms or used by the goverment to design regulations to improve the efficiency of this industry. In the first paper, titled, Homogenous and Heterogenous Contestants in Cardinal Tournament Games: Theory and Empirical Analysis with T. Vukina, we show that sorting contestants in cardinal tournaments into more or less heterogenous groups creates different incentives for agents to exert effort. In particular we show that for a given
mean of the tournament group's heterogeneity parameters, larger variance (more heterogenous agents) induces higher optimal effort. This implies that the principal can actually gain from heterogenizing the tournament groups. On the other hand, the effect of this change on growers' welfare is unclear because higher effort leads to higher productivity and hence higher payment, but also increases the cost of effort. Using broiler production contracts settlement data we empirically estimated a fully structural model of a cardinal tournament game with heterogenous players. Our counterfactual analysis shows that under reasonable assumptions the integrator's gain is actually larger than the growers' losses indicating that heterogenizing groups in cardinal tournaments may be efficient. In the second paper, titled, Moral Hazard, Heterogeneous Agents, and Imperfect Supervision: A Structural Approach with M. Bellemare, we analyze the contract data of an exporting firm that delegates its
production to small rural producers using data from Madagascar. Using structural modeling techniques, we estimate a principal-agent model that incorporates moral hazard, heterogeneous agents, and imperfect supervision. Our approach allows us to recover the model's underlying parameters and to quantify the welfare effects of imperfect supervision. We find that supervision has a total welfare effect that is positive and equal to over 13 percent of the value of the principal's total revenue. Based on our findings, we argue in favor of a scaling up of contract farming activities in Madagascar.
TARGET AUDIENCES: Meat and vegetable packing industries
Impacts
We plan to convey our research findings to the meat packing industries and vegatable packing industries through extension services. With the knowledge from both articles, we expect those meat packing firms which use the cardinal tournament for organizing the growing services will try to further homogenizing the tournament growers in terms of grower ability and hence improve efficiency. We also expect those vegetable packing companies will try to further monitor the growing services provided by their contract farmers to make the production more efficient. From our calculations, we expect these improvements in production organization will save millions of dollars in production costs for firms in these industries in the long run. These savings will further benefit consumers, both in North Carolina and the U.S. as a whole, through price cuts. It will also benefit workers and farmers working for firms in this industry through higher wage and benefits and more job
security.
Publications
- Zheng, X. and D. Zimmer (2008) Farmers' Health Insurance and Access to Health Care, American Journal of Agricultural Economics.
- Li, T. and X. Zheng (2008)Semiparametric Bayesian Inference for Dynamic Tobit Panel Data Models with Unobserved Heterogeneity, Journal of Applied Econometrics.
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Progress 10/01/05 to 09/30/06
Outputs
During 10/01/2005 to 09/30/2010, my research efforts focus on the optimal use of production contracts used by poultry companies to procure growing services from the farmers. The methodology used is the new empirical Industrial Organization structural approach as originally proposed in this project. Such efforts have resulted in two research articles, both of which have been accepted for publication at leading economic journals. The findings from these articles can be used by firms to imporve their production organization mechanisms or used by the goverment to design regulations to improve the efficiency of this industry. In the first paper, titled, Efficiency Gains from Organizational Innovation: Comparing Ordinal and Cardinal Tournament Games in Broiler Contracts with T. Vukina, we analyze the contract settlement data coming from a poultry company who contracts the production of broiler chickens with a group of independent growers. The company originally used
rank-order (ordinal) tournaments to compensate their contract growers and later switched to cardinal tournaments. We found that switching from a rank-order tournament to a cardinal tournament improved social welfare. The efficiency gains are shared between the principal (company) and the agents (growers). Hence, this research paper offers an economic justification on the use of cardinal tournament in modern livestock production contracts. In the second paper, titled, Structural Estimation of Rank-Order Tournament Games with Private Information with T. Vukina, we propose a game-theoretic model of a rank-order tournament with private information and characterize its equilibrium solution. The model captures many important features of the production contracts once observed in the poultry industry. We show that growers' equilibrium effort depends on three factors: the spread in piece rates between the performance brackets, the number of players in each tournament, and the number of
performance brackets used. Hence, this research paper offers a new methodology that allows poultry companies to design the optimal incentive schemes for chicken growers and both the poultry companies as well as the chicken growers can benefit by the improvement in contract designs.
Impacts
We plan to convey our research findings to the meat packing industries through extension services. With the knowledge from the first article, we expect those firms which still use the rank-order tournament to switch to the cardinal tournament. Or if they choose to continue to use the rank-order tournament as a way to organize production, they can use the findings of our second research to fine tune the parameters in such tournaments. From our calculations, we expect these improvements in production organization will save millions of dollars in production costs for firms in this industry in the long run. These savings will further benefit consumers, both in North Carolina and the U.S. as a whole, through price cuts. It will also benefit workers and farmers working for firms in this industry through higher wage and benefits and more job security.
Publications
- Zheng, X. and T. Vukina, 2007 Efficiency Gains from Organizational Innovation: Comparing Ordinal and Cardinal Tournament Games in Broiler Contracts. International Journal of Industrial Organization.
- Vukina, T. and X. Zheng, 2007 Structural Estimation of Rank-Order Tournaments with Private Information. American Journal of Agricultural Economics.
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