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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 estimation of the parameters of a structural model of an incentive contract under moral hazard, taking into account agents heterogeneity in preferences. 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 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 because of lower reservation utilities.

Suggested Citation

  • Dubois, Pierre & Vukina, Tomislav, 2006. "Optimal Incentives under Moral Hazard and Heterogeneous Agents: Evidence from Production Contracts Data," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25568, International Association of Agricultural Economists.
  • Handle: RePEc:ags:iaae06:25568
    DOI: 10.22004/ag.econ.25568
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    Cited by:

    1. 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.
    2. Biroli, Pietro & Zwyssig, Laura, 2021. "Moral Hazard Heterogeneity: Genes and Health Insurance Influence Smoking after a Health Shock," IZA Discussion Papers 14176, Institute of Labor Economics (IZA).
    3. Jiaojie Han & Amnon Rapoport & Rui Zhao, 2017. "Inequity-aversion and relative kindness intention jointly determine the expenditure of effort in project teams," PLOS ONE, Public Library of Science, vol. 12(5), pages 1-23, May.
    4. Zhen Wang & Tomislav Vukina, 2017. "Welfare effects of payment truncation in piece rate tournaments," Journal of Economics, Springer, vol. 120(3), pages 219-249, April.
    5. 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.
    6. 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.
    7. 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.

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    More about this item

    Keywords

    Production Economics;

    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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