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The Role of Risk in Contract Choice

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Author Info
Allen, Douglas W
Lueck, Dean

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Abstract

Structuring contracts to share risk in light of incentive problems is the central premise of contract theory, yet the risk-sharing implications have rarely been thoroughly tested using micro-level contract data. In this article we test the major implications of a principal-agent model of contracts using detailed data on more than 4,000 individual contracts from modern North American agriculture. On a case-by-case basis, our evidence fails to support the standard principal-agent model with risk aversion as an explanation of contract choice in modern North American farming. At the same time, we find some support for models that assume risk-neutral contracting parties and stress multiple margins for moral hazard and enforcement costs. Copyright 1999 by Oxford University Press.

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Publisher Info
Article provided by Oxford University Press in its journal Journal of Law, Economics and Organization.

Volume (Year): 15 (1999)
Issue (Month): 3 (October)
Pages: 704-36
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Handle: RePEc:oup:jleorg:v:15:y:1999:i:3:p:704-36

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  1. Bovenberg, L. & Teulings, C.N., 2002. "Insurance and information: firms as a commitment device," Discussion Paper 36, Tilburg University, Center for Economic Research. [Downloadable!]
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  2. Mendi, Pedro, 2005. "Contracting for the transfer of technology within multinational corporations: Empirical evidence from Spain," IESE Research Papers D/607, IESE Business School. [Downloadable!]
  3. Paul H. Jensen & Robin E. Stonecash, 2004. "The Efficiency of Public Sector Outsourcing Contracts: A Literature Review," Melbourne Institute Working Paper Series wp2004n29, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne. [Downloadable!]
  4. Matthew Ellman, 2006. "The Optimal Length of Contracts with Application to Outsourcing," Economics Working Papers 965, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  5. David R Stead, . "Fixed Rent Contracts in English Agriculture, 1750-1850: A Conjecture," Discussion Papers 05/01, Department of Economics, University of York. [Downloadable!]
  6. Pedro Mendi, 2003. "The Structure of Payments in Technology Transfer Contracts: Evidence from Spain," Faculty Working Papers 05/03, School of Economics and Business Administration, University of Navarra. [Downloadable!]
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  7. Yutaka Arimoto & Tetsuji Okazaki & Masaki Nakabayashi, 2005. "Risk, Transaction Costs, and Geographic Distribution of Share Tenancy: A Case of Pre-War Japan," CIRJE F-Series CIRJE-F-322, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  8. Eric Hilt, 2006. "The Negative Trade-off Between Risk and Incentives: Evidence from the American Whaling Industry," NBER Working Papers 11960, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Luis H.B. Braido, 2005. "Risk and Insurance in Sharecropping," Risk and Insurance 0508002, EconWPA. [Downloadable!]
  10. Paul H. Jensen & Robin E. Stonecash, 2005. "Contract Efficiency in the Presence of Demand and Cost Uncertainty," Melbourne Institute Working Paper Series wp2005n01, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne. [Downloadable!]
  11. Lee J. Alston & Joseph P. Ferrie, 2005. "Time on the Ladder: Career Mobility in Agriculture, 1890-1938," NBER Working Papers 11231, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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