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Double Sided Moral Hazard and Share Contracts in agriculture

  • Fernandez-Olmos, Marta
  • Rosell-Martinez, Jorge
  • Espitia-Escuer, Manuel Antonio
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    This paper develops a double-sided moral hazard model of share contract in agriculture, with imperfect quality measurement by the agent and the principal, who contribute to the final good quality in terms of production effort and marketing effort respectively. Using this model, we analyse the implications of the share contract for quantity and quality, often ignored in previous analysis. With the help of a simulation exercise, we prove that the outcome-conditioned share generally weakens the agent´s incentive to make effort in quality input. This finding could explain the contractual evidence in some differentiated markets such as the wine market, where bottle-price conditioned contracts are rarely used.

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    File URL: http://purl.umn.edu/43863
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    Paper provided by European Association of Agricultural Economists in its series 2008 International Congress, August 26-29, 2008, Ghent, Belgium with number 43863.

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    Date of creation: 2008
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    Handle: RePEc:ags:eaae08:43863
    Contact details of provider: Web page: http://www.eaae.org
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    1. Stiglitz, Joseph E, 1974. "Incentives and Risk Sharing in Sharecropping," Review of Economic Studies, Wiley Blackwell, vol. 41(2), pages 219-55, April.
    2. Eswaran, Mukesh & Kotwal, Ashok, 1985. "A Theory of Two-Tier Labor Markets in Agrarian Economies," American Economic Review, American Economic Association, vol. 75(1), pages 162-77, March.
    3. Francine Lafontaine, 1992. "Agency Theory and Franchising: Some Empirical Results," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 263-283, Summer.
    4. Hueth, Brent & Ligon, Ethan, 2001. "Agricultural Markets As Relative Performance Evaluation," Staff General Research Papers 5036, Iowa State University, Department of Economics.
    5. Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
    6. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
    7. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
    8. Alexander, Corinne E. & Goodhue, Rachael E. & Rausser, Gordon C., 2000. "Do Quality Incentives Matter?," Working Papers 11946, University of California, Davis, Department of Agricultural and Resource Economics.
    9. Rubin, Paul H, 1978. "The Theory of the Firm and the Structure of the Franchise Contract," Journal of Law and Economics, University of Chicago Press, vol. 21(1), pages 223-33, April.
    10. Champsaur, Paul & Rochet, Jean-Charles, 1989. "Multiproduct Duopolists," Econometrica, Econometric Society, vol. 57(3), pages 533-57, May.
    11. Shah, Salman & Thakor, Anjan V, 1988. " Private versus Public Ownership: Investment, Ownership Distribution, and Optimality," Journal of Finance, American Finance Association, vol. 43(1), pages 41-59, March.
    12. Oczkowski, Edward, 2001. "Hedonic Wine Price Functions and Measurement Error," The Economic Record, The Economic Society of Australia, vol. 77(239), pages 374-82, December.
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