Retained interest in seedstock bulls: a transaction cost analysis

Abstract

Seedstock cattle producers invest in bulls to introduce high quality genes into their cattle herds. Because the genetic traits bulls pass on to their calves are sometimes unobservable before breeding season, the quality of the bull at the time of the sale is uncertain. Some producers choose to sell bulls with retained semen interest, which grants them rights to the specified percentage of revenues from semen sales from the bull after it has been sold. This thesis examines the practice of retained semen interest in bulls and its effects on sale prices for the bull. After adapting the theory of auctions and share contracts and developing a theory of retained interest, I empirically test my hypotheses that 1) if there is more uncertainty regarding the attributes of the bull, the producer will be more likely to use a retained interest contract, and 2) a retained interest contract increases the value of a bull. I use a logit model to test the first hypothesis and hedonic price model, estimated using OLS, to test the second model. I find evidence to support both predictions, which supports my transaction cost model of contract choice. After controlling for quality, producers are more likely to retain interest in bulls that have greater variation in their quality. Also, bulls that are sold with retained interest earn significant premiums compared to bulls sold with lump sum prices. These results add to the transaction cost and share contract economic literature, as well as inform seedstock producers about the economic costs and benefits of retaining semen interest.