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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. ...French Abstract : L'objectif de cet article est de développer un cadre analytique pour l'estimation des paramètres d'un modèle structurel de contrat incitatif sous aléa moral prenant en compte l'hétérogénéité des préférences des agents. Les auteurs montrent qu'en permettant au principal d'allouer stratégiquement les inputs de production entre agents hétérogènes dans le choix du contrat, le principal est capable de transformer des contrats apparemment uniformes en contrats individuels paramétrés en fonction des préférences des agents ou de leurs caractéristiques. En utilisant des données microéconomiques sur la production porcine aux Etats-Unis, on s'aperçoit que les fermiers qui contractent sont hétérogènes vis à vis de leur aversion au risque et que cette hétérogénéité affecte l'allocation des inputs du principal entre les fermiers. En utilisant l'hypothèse identifiante que les contrats sont optimaux, on obtient une borne supérieure
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Suggested Citation

  • Dubois, Pierre & Vukina, Tomislav, 2008. "Optimal Incentives under Moral Hazard and Heterogeneous Agents: Evidence from Production Contracts Data," IDEI Working Papers 393, Institut d'Économie Industrielle (IDEI), Toulouse.
  • Handle: RePEc:ide:wpaper:3384
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    References listed on IDEAS

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    1. Pierre Dubois & Tomislav Vukina, 2004. "Grower Risk Aversion and the Cost of Moral Hazard in Livestock Production Contracts," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(3), pages 835-841.
    2. Paarsch, Harry J & Shearer, Bruce, 2000. "Piece Rates, Fixed Wages, and Incentive Effects: Statistical Evidence from Payroll Records," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 59-92, February.
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    6. Armando Levy & Tomislav Vukina, 2002. "Optimal linear contracts with heterogeneous agents," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 29(2), pages 205-217, June.
    7. Daniel A. Ackerberg & Maristella Botticini, 2002. "Endogenous Matching and the Empirical Determinants of Contract Form," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 564-591, June.
    8. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
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    10. Harry J. Paarsch & Bruce Shearer, 2004. "Male-Female Productivity Differentials: The Role of Ability and Incentives," CIRANO Working Papers 2004s-17, CIRANO.
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    12. Pannenberg, Markus, 2007. "Risk Aversion and Reservation Wages," IZA Discussion Papers 2806, Institute of Labor Economics (IZA).
    13. Cox, James C & Oaxaca, Ronald L, 1992. "Direct Tests of the Reservation Wage Property," Economic Journal, Royal Economic Society, vol. 102(415), pages 1423-1432, November.
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    17. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
    18. Porametr Leegomonchai & Tomislav Vukina, 2005. "Dynamic Incentives and Agent Discrimination in Broiler Production Tournaments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(4), pages 849-877, December.
    19. Paarsch, Harry J. & Shearer, Bruce S., 2007. "Do women react differently to incentives? Evidence from experimental data and payroll records," European Economic Review, Elsevier, vol. 51(7), pages 1682-1707, October.
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    Cited by:

    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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

    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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