Contracts and Risk in Agriculture: Conceptual and Empirical Foundations

  • Brent Hueth
  • David A. Hennessy
Part of the Natural Resource Management and Policy book series (NRMP, volume 23)


Though farm-level risks, risk attitudes, and associated behavioral consequences have been extensively investigated by agricultural economists, comparatively little research has focused on why farmers face risk. It is evident that markets for agricultural production and price risk are generally incomplete. Even in commodities with well-developed markets for price futures, farmers still face considerable production risk; for example, attempts to establish private (unsubsidized) insurance markets for multiple-peril yield risks have universally failed (Knight and Coble 1997). The natural conclusion to draw from this and other supporting evidence is that farmers face risk because it is organizationally efficient. The costs of farm-level risk are well documented. It follows that there must be significant benefits associated with farmers’ exposure to risk. Contract theory, and principal-agent theory in particular, provides a decision environment where these benefits are explicitly modeled, and hence where farmers’ exposure to risk can be endogenized.1


Hide Information Contract Theory Spot Market Production Risk Price Risk 
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Copyright information

© Springer Science+Business Media New York 2002

Authors and Affiliations

  • Brent Hueth
    • 1
  • David A. Hennessy
    • 1
  1. 1.Iowa State UniversityUSA

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