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

  • Dubois, Pierre
  • Vukina, Tomislav

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.

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Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 27 (2009)
Issue (Month): 4 (July)
Pages: 489-500

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Handle: RePEc:eee:indorg:v:27:y:2009:i:4:p:489-500
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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  7. Pierre Dubois, 1999. "Moral Hazard, Land Fertility and Sharecropping in a Rural Area of the Philippines," Working Papers 99-30, Centre de Recherche en Economie et Statistique.
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  16. Cox, James C & Oaxaca, Ronald L, 1992. "Direct Tests of the Reservation Wage Property," Economic Journal, Royal Economic Society, vol. 102(415), pages 1423-32, November.
  17. 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.
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