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Optimal Incentives under Moral Hazard and Heterogeneous Agents: Evidence from Production Contracts Data

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Author Info
Dubois, Pierre
Vukina, Tomislav

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Abstract

The objective of this paper is to develop an analytical framework for estimation of the parameters of a structural model of an incentive contract under moral hazard, taking into account agents heterogeneity in preferences. We show that allowing the principal to strategically distribute the production inputs across heterogenous agents as part of the contract design, the principal is able to change what appears to be a uniform contract into individualized contracts tailored to fit agents’ preferences or characteristics. Using micro level data on swine production contract settlements, we find that contracting farmers are heterogenous with respect to their risk aversion and that this heterogeneity affects the principal’s allocation of production inputs across farmers. Relying on the identifying assumption that contracts are optimal, we obtain the estimates of a lower and an upper bound of agents’ reservation utilities. We show that farmers with higher risk aversion have lower outside opportunities because of lower reservation utilities.

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Publisher Info
Paper provided by International Association of Agricultural Economists in its series 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia with number 25568.

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Date of creation: 2006
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Handle: RePEc:ags:iaae06:25568

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Related research
Keywords: Agency Contracts; Optimal Incentives; Moral Hazard; Risk Aversion; Heterogeneity; Production Economics; D82; L24; Q12; K32; L51;

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  1. Pierre Dubois & Tomislav Vukina, 2004. "Grower Risk Aversion and the Cost of Moral Hazard in Livestock Production Contracts," American Journal of Agricultural Economics, American Agricultural Economics Association, vol. 86(3), pages 835-841, 08. [Downloadable!] (restricted)
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  2. Paarsch, Harry J & Shearer, Bruce, 2000. "Piece Rates, Fixed Wages, and Incentive Effects: Statistical Evidence from Payroll Records," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 59-92, February.
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  3. Chiappori, Pierre-Andre & Durand, Franck & Geoffard, Pierre-Yves, 1998. "Moral hazard and the demand for physician services: First lessons from a French natural experiment," European Economic Review, Elsevier, vol. 42(3-5), pages 499-511, May. [Downloadable!] (restricted)
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  4. Pierre Dubois, . "Moral Hazard, Land Fertility and Sharecropping in a Rural Area of the Philippines," Working Papers 99-30, Centre de Recherche en Economie et Statistique. [Downloadable!]
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  5. Armando Levy & Tomislav Vukina, 2002. "Optimal linear contracts with heterogeneous agents," European Review of Agricultural Economics, Oxford University Press for the Foundation for the European Review of Agricultural Economics, vol. 29(2), pages 205-217, June.
  6. Harry J. Paarsch & Bruce S. Shearer, 2004. "Male-Female Productivity Differentials: The Role of Ability and Incentives," CIRANO Working Papers 2004s-17, CIRANO. [Downloadable!]
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  7. Daniel A. Ackerberg & Maristella Botticini, 2002. "Endogenous Matching and the Empirical Determinants of Contract Form," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 564-591, June. [Downloadable!] (restricted)
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  8. Martin, Laura L., 1997. "Production Contracts, Risk Shifting, And Relative Performance Payments In The Pork Industry," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 29(02), December. [Downloadable!]
  9. Allen, Douglas & Lueck, Dean, 1992. "Contract Choice in Modern Agriculture: Cash Rent versus Cropshare," Journal of Law & Economics, University of Chicago Press, vol. 35(2), pages 397-426, October.
  10. Jaap H. Abbring & Pierre-André Chiappori & Jean Pinquet, 2003. "Moral Hazard and Dynamic Insurance Data," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 767-820, 06. [Downloadable!] (restricted)
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  11. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March. [Downloadable!] (restricted)
  12. Jaap H. Abbring & James J. Heckman & Pierre-André Chiappori & Jean Pinquet, 2003. "Adverse Selection and Moral Hazard In Insurance: Can Dynamic Data Help to Distinguish?," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 512-521, 04/05. [Downloadable!] (restricted)
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