Agricultural Contracting in Roman Palestine : Risk Sharing or Moral Hazard?

In many contracts that deal with the division of future quantities, there is a tension between risk-sharing aspects and incentive aspects. Over the last twenty-five there has been relatively more attention paid to these incentive aspects, particularly moral hazard. In this paper, we point out that risk-sharing is, nevertheless, a very important part of such contracts. Furthermore, contract characteristics that seem to be motivated by moral hazard considerations may sometimes turn out to actually be motivated by risk-sharing needs. We investigate the economic rationale for a law pertaining to tenancy in Roman Palestine, found in a Jewish legal text. This law allows for risk-sharing (through rent reduction) between tenant and landlord when the macro-economic situation is severe (makas medina), but not if the particular rental plot has a bad harvest. We consider and reject the possibility that the restriction of risk-sharing to times of makas medina can be explained from a moral hazard perspective. We show, rather, that this feature of the rental contract can be explained as the optimal rental contract in an economy characterized by tenants whose income sources are diversified. We provide empirical evidence supporting this possibility