External equity in agriculture: Risk sharing and incentives in a principal‐agent relationship Academic Article uri icon

abstract

  • © 2002, Emerald Group Publishing Ltd. All rights reserved. The moral hazard problem which obstructs external equity financing of farm businesses is studied using the principalagent framework. We assume that the supplier of external equity capital (the principal) cannot directly observe the farmer’s (agent’s) effort, but can observe the random outcome of the effort. We solve for the optimal farm income-sharing rule that includes an extra share to the agent. The extra share is dependent on the random outcome and is provided to induce optimal effort from the agent. Results show a farmer’s effort is inversely related to the level of risk aversion and the riskiness of the project. Thus, an investor must share more income when a farmer is more risk averse or a project is more risky.

author list (cited authors)

  • Wang, Z., Leatham, D. J., & Chaisantikulawat, T.

citation count

  • 2

publication date

  • May 2002