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The Role of Risk in Contract Choice

Douglas Allen () and Dean Lueck

Journal of Law, Economics, and Organization, 1999, vol. 15, issue 3, 704-36

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 4,000 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. Copyright 1999 by Oxford University Press.

Date: 1999
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