The role of risk in contract choice

Douglas W. Allen, Dean Lueck

Research output: Contribution to journalArticle

74 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)704-736
Number of pages33
JournalJournal of Law, Economics, and Organization
Volume15
Issue number3
StatePublished - Oct 1 1999

ASJC Scopus subject areas

  • Economics and Econometrics
  • Organizational Behavior and Human Resource Management
  • Law

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