Self-Enforcing Linear Contracts

This paper examines the self-enforcing conditions of linear contracts commonly used in agriculture. In a repeated game between a risk neutral principal and a risk averse agent, I show that when contracts are constrained by the requirement of being self-enforcing, risk aversion and variance can only partly explain the incentive intensity in contracts. Also ex post bargaining power and outside options will determine contract choice. If the agent's ex post bargaining position is weak, the principal cannot commit to high-powered incentives, while if the agent's ex post bargaining position is good, the agent cannot commit to low-powered incentives. The model may thus explain why risk averse agents sometimes meet high-powered incentive contracts that are quite similar to fixed rental contracts, and why risk neutral agents can meet share contracts with lower-powered incentives