Optimal Incentives under Moral Hazard and Heterogeneous Agents: Evidence from Production Contracts Data

Pierre Dubois and Tomislav Vukina

No 6011, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The objective of this paper is to develop an analytical framework for estimation of the parameters of a structural model of an incentive contract under moral hazard, taking into account agents heterogeneity in preferences. We show that allowing the principal to strategically distribute the production inputs across heterogenous agents as part of the contract design, the principal is able to change what appears to be a uniform contract into individualized contracts tailored to fit agents' preferences or characteristics. Using micro level data on swine production contract settlements, we find that contracting farmers are heterogenous with respect to their risk aversion and that this heterogeneity affects the principal's allocation of production inputs across farmers. Relying on the identifying assumption that contracts are optimal, we obtain the estimates of a lower and an upper bound of agents' reservation utilities. We show that farmers with higher risk aversion have lower outside opportunities because of lower reservation utilities.

Keywords: Agency contracts; Heterogeneity; Moral hazard; Optimal incentives; Risk aversion (search for similar items in EconPapers)
JEL-codes: D82 K32 L24 (search for similar items in EconPapers)
Date: 2006-12
New Economics Papers: this item is included in nep-agr, nep-law and nep-mic
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Related works:
Journal Article: Optimal incentives under moral hazard and heterogeneous agents: Evidence from production contracts data (2009)
Working Paper: Optimal Incentives under Moral Hazard and Heterogeneous Agents: Evidence from Production Contracts Data (2008)
Working Paper: Optimal Incentives under Moral Hazard and Heterogeneous Agents: Evidence from Production Contracts Data (2006)
Working Paper: Optimal Incentives Under Moral Hazard and Heterogeneous Agents: Evidence from Production Contracts Data (2005)
Working Paper: Optimal incentives under moral hazard and heterogeneous agents: evidence from production contracts data (2005)
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