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Risk Aversion as Effort Incentive: A Correction and Prima Facie Test of the Moral Hazard Theory of Share Tenancity

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Author Info
Mark A. DeWeaver () (Ithaca Advisors, LLC)
James A. Roumasset () (Department of Economics, University of Hawaii at Manoa)

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Abstract

We show that Stiglitz's (1974) classic 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 the tenant's inherent 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 instead of lower 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 inherent risk aversion. Landlords choose rent contracts for both high and low levels of risk aversion. For intermediate levels, the optimal sharing rates are 80% and above. In contrast, actual sharing rates in the study area ranged from 50-60%, with most farmers contracted on a 50:50 basis. We conclude that the risk-aversion versus moral hazard theory of tenure choice is incomplete. 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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File URL: http://www.economics.hawaii.edu/research/workingpapers/WP_02-61.pdf
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File Function: First version, 2002
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Paper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 200206.

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Length: 18 pages
Date of creation: 2002
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Handle: RePEc:hai:wpaper:200206

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Stiglitz, Joseph E, 1974. "Incentives and Risk Sharing in Sharecropping," Review of Economic Studies, Blackwell Publishing, vol. 41(2), pages 219-55, April. [Downloadable!] (restricted)
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  2. Roumasset, James & Uy, Marilou, 1980. "Piece rates, time rates, and teams : Explaining patterns in the employment relation," Journal of Economic Behavior & Organization, Elsevier, vol. 1(4), pages 343-360, December. [Downloadable!] (restricted)
  3. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-39, May. [Downloadable!] (restricted)
  4. Rao, C H Hanumantha, 1971. "Uncertainty, Entrepreneurship, and Sharecropping in India," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 578-95, May-June. [Downloadable!] (restricted)
  5. Sappington, David E M, 1991. "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 45-66, Spring. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. James Roumasset, 2006. "The Economics of Agricultural Development: What Have We Learned? Processes," Working Papers 200604, University of Hawaii at Manoa, Department of Economics. [Downloadable!]
  2. James Andreoni, 2007. "Social Image and the 50-50 Norm: A Theoretical and Experimental Analysis of Audience Effects," Levine's Bibliography 122247000000001459, UCLA Department of Economics. [Downloadable!]
  3. Roumasset, James, 2006. "The Economics of Agricultural Development: What Have We Learned?," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25598, International Association of Agricultural Economists. [Downloadable!]
  4. 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. [Downloadable!]
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