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The Structural Estimation of Principal-Agent Models by Least Squares: Evidence from Land Tenancy in Madagascar

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  • Brown, Zachary S.
  • Bellemare, Marc F.

Abstract

We develop a method to structurally estimate principal-agent models by ordinary least squares (OLS). We set up a general principal-agent model which explicitly incorporates the wealth levels of each party and the opportunity cost to the agent of entering the contract. This yields an optimal contract that is linearized by way of an Nth order Taylor approximation. This in turn imposes N(3N-1)/2 restrictions on the parameters and yields an empirical test of the canonical principal-agent model. In the application, we consider the case where N = 2 and apply our method to a sample of land tenancy contracts in rural Madagascar. Empirical tests lead to consistent failure to reject the hypotheses derived from our structural model, which lends support to our structural method as well as to the canonical principal-agent model.

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Bibliographic Info

Paper provided by Agricultural and Applied Economics Association in its series 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin with number 49368.

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Date of creation: 30 Apr 2009
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Handle: RePEc:ags:aaea09:49368

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Keywords: Principal-Agent Models; Contract Theory; Structural Estimations; Risk and Uncertainty; C12; C13; D86; O12; Q12;

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  1. Ferrall, Christopher & Shearer, Bruce, 1999. "Incentives and Transactions Costs within the Firm: Estimating an Agency Model Using Payroll Records," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 309-38, April.
  2. Caputo,Michael R., 2005. "Foundations of Dynamic Economic Analysis," Cambridge Books, Cambridge University Press, number 9780521842723, December.
  3. Margiotta, Mary M & Miller, Robert A, 2000. "Managerial Compensation and the Cost of Moral Hazard," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(3), pages 669-719, August.
  4. Daniel A. Ackerberg & Maristella Botticini, 1999. "Endogenous Matching and the Empirical Determinants of Contract Form," Papers 0096, Boston University - Industry Studies Programme.
  5. Paarsch, H-J & Shearer, B, 1996. "Piece Rates, Fixed Wages, and Incentive Effects : Statistical Evidence From Payroll Records," Papers 9623, Laval - Recherche en Energie.
  6. Bellemare, Marc F., 2010. "Insecure Land Rights and Share Tenancy in Madagascar," MPRA Paper 23640, University Library of Munich, Germany.
  7. Bellemare, Marc F. & Brown, Zachary S., 2009. "On the (Mis)Use of Wealth as a Proxy for Risk Aversion (PowerPoint)," SCC-76 Meeting, March 19-21, 2009, Galveston, Texas 48913, SCC-76: Economics and Management of Risk in Agriculture and Natural Resources.
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