Risk aversion as effort incentive: A correction and prima facie test of the moral hazard theory of share tenancy
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.
Volume (Year): 15 (2002)
Issue (Month): 4 ()
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- 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.
- 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.
- 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.
- Joseph E. Stiglitz, 1973.
"Incentives and Risk-Sharing in Sharecropping,"
Cowles Foundation Discussion Papers
353, Cowles Foundation for Research in Economics, Yale University.
- David E. M. Sappington, 1991. "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 45-66, Spring.
- 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.
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