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Optimal Tenurial Contracts Under Both Moral Hazard and Adverse Selection
Author(s) -
At Christian,
Thomas Lionel
Publication year - 2019
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1093/ajae/aay049
Subject(s) - adverse selection , moral hazard , sharecropping , landlord , pooling , microeconomics , monopoly , business , incentive , economics , actuarial science , computer science , law , ecology , artificial intelligence , political science , biology , agriculture
Abstract This paper determines the optimal tenurial contract between a monopoly landlord and a tenant protected by limited liability under both adverse selection (based on the tenant's ability) and moral hazard (based on the tenant's choice of effort). We identify different optimal contracts depending on the tenant's outside option. For intermediate values, there is a threshold of tenant ability depending on the outside option level below which the optimal contract is a separating sharecropping contract, and a pooling one otherwise. We also find that an increase in the outside option does not monotonically increase the tenant's optimal effort.