Evidence on the Relationship between Incentives and Exogenous Risk
Posted: 8 Jul 2004
Date Written: March 30, 2004
Abstract
Theoretical models on moral hazard provide competing predictions on the relationship between pay-for-performance incentives and risk. These predictions are derived under the assumptions that agents are homogeneous and risk is exogenous. This paper tests the incentive-risk relationship by means of a longitudinal database on tenancy contracts. Detailed information on cropping activities is used to construct a plot-level measure for exogenous risk. The existence of tenants managing multiple plots under different contracts is used to account for risk-aversion heterogeneity and other self-selection issues. Contrary to the standard risk-sharing prediction, I find a positive correlation between incentives and exogenous risk.
Keywords: Tenancy, data, risk, incentives, delegation, principal, agent
JEL Classification: C52, D82, O12, Q15
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