Rent sharing mechanisms in production alliances

U.S. hog production has become an industrialized process. New technology has caused the scale of operations to increase, and the organizational form of hog farms to change. One of the new organizational forms can be found in North Carolina and Colorado where vertical integration and/or franchise-like production methods prevail. This type of production may not be possible or appealing to some producers. Instead, they may be able to reap some of the benefits of specialization by forming strategic alliances. The purpose of the paper is to answer the question: is it possible to create the same sort of control mechanisms in a production alliance that exist in a vertically integrated firm? Production risk is potentially one of the greatest problems in an alliance. We represent production risk with two measurements of performance - pig weight, and pig mortality. We find that high mortality has severe consequences for pig production. But, with appropriate rent allocation mechanisms, the member who causes under-production will be forced to bear most of the consequences.