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Self-enforcing contracts in agriculture

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  • Ola Kvaløy

Abstract

This article examines a self-enforcing contract between a risk-neutral principal and a risk-averse agent who is able to hold up values ex post. It shows that risk aversion and variance can only partly explain the contract's incentive intensity. Ex post bargaining power and outside options will also determine contract choice. If the agent's ex post bargaining position is weak, the principal cannot commit to high-powered incentives, whereas if the agent's ex post bargaining position is good, the agent cannot commit to low-powered incentives. The model may thus explain some puzzles in agricultural contracts, in particular why risk-averse agents sometimes accept to be governed by high-powered incentive contracts that are quite similar to fixed rental contracts, and why risk-neutral agents are sometimes offered share contracts with lower-powered incentives. Copyright 2006, Oxford University Press.

Suggested Citation

  • Ola Kvaløy, 2006. "Self-enforcing contracts in agriculture," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 33(1), pages 73-92, March.
    • Handle: RePEc:oup:erevae:v:33:y:2006:i:1:p:73-92
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    Cited by:

    1. Mkhabela, Thulasizwe, 2018. "Dual Moral Hazard and Adverse Selection in South African Agribusiness: It Takes Two to Tango," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association, vol. 21(3), February.
    2. Skidmore, Marin & Baylis, Kathy & Arends-Kuenning, Mary P. & Michelson, Hope C., 2017. "The Effect of Intermediary Market Power on Grain Quality in India," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 259174, Agricultural and Applied Economics Association.
    3. Tang, Christopher S. & Sodhi, ManMohan S. & Formentini, Marco, 2016. "An analysis of partially-guaranteed-price contracts between farmers and agri-food companies," European Journal of Operational Research, Elsevier, vol. 254(3), pages 1063-1073.
    4. Jano, Pilar & Hueth, Brent, 2013. "Quality Incentives in Informal Markets: The Case of Ecuadorian Cocoa," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150378, Agricultural and Applied Economics Association.
    5. repec:ags:aaea13:150001 is not listed on IDEAS

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