Risk aversion as effort incentive: A correction and prima facie test of the moral hazard theory of share tenancy
AbstractWe show that Stiglitz's (1974) principal-agency theory of share tenancy does not imply, as alleged, that the optimal tenant share is less than one for risk-averse tenants nor that the share decreases monotonically with tenant risk aversion. Tenants may self insure by working harder increasingly so for higher levels of risk aversion with the result that the more risk averse work for higher shares. When the model is parameterized based on previous studies of Philippine agriculture, it predicts a U-shaped relationship between optimal tenant''s share and risk aversion. Landlords choose rent contracts for both high and low levels of risk aversion and shares from 80-99% for intermediate levels. In contrast, actual shares in the study area ranged from 50-60%, with most farmers contracted on a 50:50 basis. We conclude that rent contracts must have additional disadvantages and/or share tenancy additional benefits that are not accounted for in the static principal-agency theory.
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Bibliographic InfoArticle provided by AccessEcon in its journal Economics Bulletin.
Volume (Year): 15 (2002)
Issue (Month): 4 ()
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Other versions of this item:
- Mark A. DeWeaver & James A. Roumasset, 2002. "Risk Aversion as Effort Incentive: A Correction and Prima Facie Test of the Moral Hazard Theory of Share Tenancity," Working Papers 200206, University of Hawaii at Manoa, Department of Economics.
- O1 - Economic Development, Technological Change, and Growth - - Economic Development
- D2 - Microeconomics - - Production and Organizations
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"Incentives and Risk-Sharing in Sharecropping,"
Cowles Foundation Discussion Papers
353, Cowles Foundation for Research in Economics, Yale University.
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- James Roumasset, 2004. "Rural Institutions, Agricultural Development, and Pro-poor Economic Growth," Asian Journal of Agriculture and Development, Southeast Asian Regional Center for Graduate Study and Research in Agriculture, vol. 1(1), pages 61-82, June.
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