Agriculture Reference
In-Depth Information
II
RISK SHARING AS AN ALTERNATIVE FRAMEWORK
In part II (chapters 6 and 7), we examine two topics borne of models that include risk sharing
as well as incentives. This basic framework is often called the principal-agent model. In
chapter 6 we test several predictions derived from a classic risk-sharing model of contracts
against our data on individual farmland contracts, focusing on the classic prediction that the
more risky a crop, the more likely it is cropshared. Even though the idea that contracts are
often structured to share risk is a time-honored feature of contract theory, overall we find
almost no evidence to support this prediction, or many related predictions.
Within modern contract theory, this basic framework has also been used to analyze
contract relationships over time. When an agent (farmer) deals with a principal (landowner)
over time, he reveals information about his true productivity. As a result, landowners have
an incentive to exploit this. In anticipation of exploitation, the farmer shirks even more
to avoid revealing information. Landowners and farmers who contract over a long period
of time should commit themselves to contract terms to avoid this type of behavior. When
farmers are more itinerant, landowners use their experience with other farmers to
ratchet
up the terms of the contract in their favor. In chapter 7 we use the Great Plains contract
data to addresses this issue. Like our findings in chapter 6, we do not find support for this
implication of the risk-sharing framework.
