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The Role of Risk in Contract Choice

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  • Allen, Douglas W
  • Lueck, Dean

Abstract

Structuring contracts to share risk in light of incentive problems is the central premise of contract theory, yet the risk-sharing implications have rarely been thoroughly tested using micro-level contract data. In this article we test the major implications of a principal-agent model of contracts using detailed data on more than 4,000 individual contracts from modern North American agriculture. On a case-by-case basis, our evidence fails to support the standard principal-agent model with risk aversion as an explanation of contract choice in modern North American farming. At the same time, we find some support for models that assume risk-neutral contracting parties and stress multiple margins for moral hazard and enforcement costs. Copyright 1999 by Oxford University Press.

Suggested Citation

  • Allen, Douglas W & Lueck, Dean, 1999. "The Role of Risk in Contract Choice," Journal of Law, Economics, and Organization, Oxford University Press, vol. 15(3), pages 704-736, October.
  • Handle: RePEc:oup:jleorg:v:15:y:1999:i:3:p:704-36
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