Risk Aversion as Effort Incentive: A Correction and Prima Facie Test of the Moral Hazard Theory of Share Tenancity
We show that Stiglitz's (1974) classic principal-agency theory of share tenancy does not imply, as alleged, that the optimal tenant share is less than one for risk-averse tenants nor that the share decreases monotonically with the tenant's inherent risk aversion. Tenants may self insure by working harder--increasingly so for higher levels of risk aversion--with the result that the more risk averse work for higher instead of lower shares. When the model is parameterized based on previous studies of Philippine agriculture, it predicts a U-shaped relationship between optimal tenant's share and inherent risk aversion. Landlords choose rent contracts for both high and low levels of risk aversion. For intermediate levels, the optimal sharing rates are 80% and above. In contrast, actual sharing rates in the study area ranged from 50-60%, with most farmers contracted on a 50:50 basis. We conclude that the risk-aversion versus moral hazard theory of tenure choice is incomplete. Rent contracts must have additional disadvantages and/or share tenancy additional benefits that are not accounted for in the static principal-agency theory.
|Date of creation:||2002|
|Date of revision:|
|Contact details of provider:|| Postal: 2424 Maile Way, Honolulu, HI 96822|
Web page: http://www.economics.hawaii.edu/
More information through EDIRC
|Order Information:|| Web: http://www.economics.hawaii.edu/research/working.html Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Roumasset, James & Uy, Marilou, 1980. "Piece rates, time rates, and teams : Explaining patterns in the employment relation," Journal of Economic Behavior & Organization, Elsevier, vol. 1(4), pages 343-360, December.
- Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-39, May.
- Joseph E. Stiglitz, 1974.
"Incentives and Risk Sharing in Sharecropping,"
Review of Economic Studies,
Oxford University Press, vol. 41(2), pages 219-255.
- David E. M. Sappington, 1991. "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 45-66, Spring.
- Rao, C H Hanumantha, 1971. "Uncertainty, Entrepreneurship, and Sharecropping in India," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 578-95, May-June.
- Reid, Joseph D., 1973. "Sharecropping As An Understandable Market Response: The Post-Bellum South," The Journal of Economic History, Cambridge University Press, vol. 33(01), pages 106-130, March.
When requesting a correction, please mention this item's handle: RePEc:hai:wpaper:200206. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Web Technician)
If references are entirely missing, you can add them using this form.