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Risk aversion as effort incentive: A correction and prima facie test of the moral hazard theory of share tenancy

Author

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  • Mark DeWeaver

    (Ithaca Advisors, LLC)

  • James Roumasset

    (University of Hawaii at Manoa)

Abstract

We show that Stiglitz's (1974) 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 tenant 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 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 risk aversion. Landlords choose rent contracts for both high and low levels of risk aversion and shares from 80-99% for intermediate levels. In contrast, actual shares in the study area ranged from 50-60%, with most farmers contracted on a 50:50 basis. We conclude that rent contracts must have additional disadvantages and/or share tenancy additional benefits that are not accounted for in the static principal-agency theory.

Suggested Citation

  • 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.
    • Handle: RePEc:ebl:ecbull:eb-01o10001
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    References listed on IDEAS

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    1. Joseph E. Stiglitz, 1974. "Incentives and Risk Sharing in Sharecropping," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(2), pages 219-255.
    2. Reid, Joseph D., 1973. "Sharecropping As An Understandable Market Response: The Post-Bellum South," The Journal of Economic History, Cambridge University Press, vol. 33(1), pages 106-130, March.
    3. Rao, C H Hanumantha, 1971. "Uncertainty, Entrepreneurship, and Sharecropping in India," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 578-595, May-June.
    4. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-139, May.
    5. David E. M. Sappington, 1991. "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 45-66, Spring.
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    Cited by:

    1. 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 (SEARCA), vol. 1(1), pages 61-82, June.
    2. James Andreoni & Deniz Aydin & Blake Barton & B. Douglas Bernheim & Jeffrey Naecker, 2020. "When Fair Isn’t Fair: Understanding Choice Reversals Involving Social Preferences," Journal of Political Economy, University of Chicago Press, vol. 128(5), pages 1673-1711.
    3. Roumasset, James A., 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.
    4. James Andreoni & B. Douglas Bernheim, 2009. "Social Image and the 50-50 Norm: A Theoretical and Experimental Analysis of Audience Effects," Econometrica, Econometric Society, vol. 77(5), pages 1607-1636, September.
    5. James Roumasset, 2006. "The Economics of Agricultural Development: What Have We Learned? Processes," Working Papers 200604, University of Hawaii at Manoa, Department of Economics.

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    More about this item

    Keywords

    agricultural contracts;

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • D2 - Microeconomics - - Production and Organizations

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