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Optimal incentives under moral hazard and heterogeneous agents : evidence from production contracts data

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  • Dubois, P.
  • Vukina, T.

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 et une borne inférieure de l'utilité de réserve des agents. Les auteurs montrent que les fermiers les plus averses au risque ont aussi les utilités de réserve les plus faibles.

Suggested Citation

  • Dubois, P. & Vukina, T., 2005. "Optimal incentives under moral hazard and heterogeneous agents : evidence from production contracts data," Economics Working Paper Archive (Toulouse) 200511, French Institute for Agronomy Research (INRA), Economics Laboratory in Toulouse (ESR Toulouse).
    • Handle: RePEc:rea:inrawp:200511
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    References listed on IDEAS

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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. 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.
    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. 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.
    5. 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.
    6. 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).
    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

    AGENCY CONTRACTS; OPTIMAL INCENTIVES; MORAL HAZARD; RISK AVERSION; HETEROGENEITY ; AGRICULTURE CONTRACTUELLE; CONTRAT; RISQUE; INCITATION; PRODUCTION ANIMALE;
    All these keywords.

    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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