Customs and Incentives in Contracts

15 Pages Posted: 28 Apr 2020

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

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Date Written: November 2009

Abstract

This article examines contractual practices that are often assumed customary. In particular it examines discreteness in agricultural contracts, and focuses on the distinction between the use of simple discrete fraction terms in cropshare contracts and the nearly continuous payment terms used in cash rent contracts. We show that the pattern of shares is best explained as a response to moral hazard problems spread over large numbers of inputs. A contracting model explains the pattern of shares, the difference in flexibility with cash rent contracts, and the lower bound on shares. Empirical analysis using micro data on over 3,000 contracts are used to test implications of the model. A wide range of support is found for a model based on moral hazard and measurement costs.

Keywords: contracts, cropshare, custom, incentives

Suggested Citation

Allen, Douglas W. and Lueck, Dean, Customs and Incentives in Contracts (November 2009). American Journal of Agricultural Economics, Vol. 91, Issue 4, pp. 880-894, 2009, Available at SSRN: https://ssrn.com/abstract=3585868 or http://dx.doi.org/10.1111/j.1467-8276.2009.01322.x

Douglas W. Allen (Contact Author)

Simon Fraser University ( email )

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Dean Lueck

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

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

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