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Optimal incentives under moral hazard and heterogeneous agents: Evidence from production contracts data

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  • Dubois, Pierre
  • Vukina, Tomislav

Abstract

The objective of this paper is to develop an analytical framework for the estimation of parameters of a structural model of an incentive contract under moral hazard, taking into account agents heterogeneity. 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 or the costs of effort 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 and hence lower reservation utilities.

Suggested Citation

  • Dubois, Pierre & Vukina, Tomislav, 2009. "Optimal incentives under moral hazard and heterogeneous agents: Evidence from production contracts data," International Journal of Industrial Organization, Elsevier, vol. 27(4), pages 489-500, July.
  • Handle: RePEc:eee:indorg:v:27:y:2009:i:4:p:489-500
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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, Agricultural and Applied Economics Association, vol. 86(3), pages 835-841.
    2. 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.
    3. 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.
    4. Pierre Dubois, 1999. "Moral Hazard, Land Fertility and Sharecropping in a Rural Area of the Philippines," Working Papers 99-30, Center for Research in Economics and Statistics.
    5. Joost M. E. Pennings, 2004. "Channel Contract Behavior: The Role of Risk Attitudes, Risk Perceptions, And Channel Members' Market Structures," The Journal of Business, University of Chicago Press, vol. 77(4), pages 697-724, October.
    6. Armando Levy & Tomislav Vukina, 2002. "Optimal linear contracts with heterogeneous agents," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 29(2), pages 205-217, June.
    7. Daniel A. Ackerberg & Maristella Botticini, 2002. "Endogenous Matching and the Empirical Determinants of Contract Form," Journal of Political Economy, University of Chicago Press, pages 564-591.
    8. 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, June.
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    15. Martin, Laura L., 1997. "Production Contracts, Risk Shifting, and Relative Performance Payments in the Pork Industry," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 29(02), pages 267-278, December.
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    17. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
    18. Porametr Leegomonchai & Tomislav Vukina, 2005. "Dynamic Incentives and Agent Discrimination in Broiler Production Tournaments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(4), pages 849-877, December.
    19. Dubois, Pierre, 2002. "Moral hazard, land fertility and sharecropping in a rural area of the Philippines," Journal of Development Economics, Elsevier, vol. 68(1), pages 35-64, June.
    20. Paarsch, Harry J. & Shearer, Bruce S., 2007. "Do women react differently to incentives? Evidence from experimental data and payroll records," European Economic Review, Elsevier, vol. 51(7), pages 1682-1707, October.
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    1. repec:kap:jeczfn:v:120:y:2017:i:3:d:10.1007_s00712-016-0516-2 is not listed on IDEAS
    2. George-Levi Gayle & Limor Golan & Robert A. Miller, "undated". "Promotion, Turover and Compensation in the Executive Market," GSIA Working Papers 2008-E32, Carnegie Mellon University, Tepper School of Business.
    3. Niemi, Jarkko K., 2012. "Designing coordination contracts to support efficient flow-scheduling in pork chain," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 125208, Agricultural and Applied Economics Association.
    4. Deng, Wendong & Hendrikse, George, 2014. "Social capital and incentives in the provision of product quality by cooperatives," 2014 International Congress, August 26-29, 2014, Ljubljana, Slovenia 182687, European Association of Agricultural Economists.
    5. Niemi, Jarkko K. & Liu, Xing & Pietola, Kyosti, 2011. "Price volatility and return on pig fattening under different price- quantity contract regimes," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114614, European Association of Agricultural Economists.

    More about this item

    Keywords

    Agency contracts Optimal incentives Moral hazard Risk aversion Heterogeneity;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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