External equity in agriculture: Risk sharing and incentives in a principalagent relationship Academic Article uri icon


  • 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 farmers (agents) effort, but can observe the random outcome of the effort. We solve for the optimal farm incomesharing 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 farmers 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.

published proceedings

  • Agricultural Finance Review

author list (cited authors)

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

citation count

  • 2

complete list of authors

  • Wang, Zijun||Leatham, David J||Chaisantikulawat, Thanapat

publication date

  • May 2002