Risk-Sharing and Agricultural Contracts
Posted: 13 Nov 1996
Date Written: March 1996
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 paper we test the major implications of a principal-agent model of contracts using detailed data on over 4,000 individual contracts from modern North American agriculture. In conducting this investigation we stress the importance of assumptions about risk preferences in generating testable implications. On a case-by-case basis, our evidence fails to support risk-sharing as an explanation of contract choice in modern North American farming. At the same time, we find support for models that assume risk-neutral contracting parties and stress multiple margins for moral hazard and enforcement costs.
JEL Classification: D23, L14, Q12
Suggested Citation: Suggested Citation