Risk Aversion as Effort Incentive: A Correction and Prima Facie Test of the Moral Hazard Theory of Share Tenancity
AbstractWe 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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Bibliographic InfoPaper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 200206.
Length: 18 pages
Date of creation: 2002
Date of revision:
Other versions of this item:
- Mark DeWeaver & James Roumasset, 2002. "Risk aversion as effort incentive: A correction and prima facie test of the moral hazard theory of share tenancy," Economics Bulletin, AccessEcon, vol. 15(4), pages 1-16.
- O1 - Economic Development, Technological Change, and Growth - - Economic Development
- D2 - Microeconomics - - Production and Organizations
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- Stiglitz, Joseph E, 1974.
"Incentives and Risk Sharing in Sharecropping,"
Review of Economic Studies,
Wiley Blackwell, vol. 41(2), pages 219-55, April.
- 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.
- Reid, Joseph D., 1973. "Sharecropping As An Understandable Market Response: The Post-Bellum South," The Journal of Economic History, Cambridge University Press, vol. 33(01), pages 106-130, March.
- David E. M. Sappington, 1991. "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 45-66, Spring.
- 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.
- 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.
- 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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