Risk and value chains: Participant sharing of risk and rewards

Abstract

Abstract Much discussion, analysis and experimentation with various forms of value chain coordination has occurred, but often, these business arrangements have not been sustainable. We address the important role that risk/reward sharing plays in developing sustainable value chains. The discussion will: 1) describe an analytical framework for determining the optimal risk/reward sharing between partners in a value chain, and 2) illustrate the application of the framework to contractual arrangements between producers and processors in the pork industry. We find that contract structures must balance the risk/reward preferences of both producers and processors in order to be sustainable.

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