The Role of Risk in Contract Choice

Posted: 29 Nov 1999

See all articles by Douglas W. Allen

Douglas W. Allen

Simon Fraser University

Dean Lueck

Indiana University Bloomington - The Vincent and Elinor Ostrom Workshop in Political Theory & Policy Analysis; Indiana University

Abstract

Structuring contracts to share risk in light of incentive problems is the central premise of contract theory, yet the risk-sharing implications have rarely been thoroughly tested using micro-level contract data. In this article we test the major implications of a principal-agent model of contracts using detailed data on more than 4000 individual contracts from modern North American agriculture. On a case-by-case basis, our evidence fails to support the standard principal-agent model with risk aversion as an explanation of contract choice in modern North American farming. At the same time, we find some support for models that assume risk-neutral contracting parties and stress multiple margins for moral hazard and enforcement costs.

Suggested Citation

Allen, Douglas W. and Lueck, Dean, The Role of Risk in Contract Choice. Available at SSRN: https://ssrn.com/abstract=172531

Douglas W. Allen

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada
604-291-3445 (Phone)
604-291-5944 (Fax)

Dean Lueck (Contact Author)

Indiana University Bloomington - The Vincent and Elinor Ostrom Workshop in Political Theory & Policy Analysis ( email )

513 N. Park Avenue
Bloomington, IN 47408–3895
United States

HOME PAGE: http://https://ostromworkshop.indiana.edu/people/directors/lueck-dean.html

Indiana University ( email )

107 S Indiana Ave
100 South Woodlawn
Bloomington, IN 47405
United States

HOME PAGE: http://https://economics.indiana.edu/home/people/lueck/

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
881
PlumX Metrics