IDEAS home Printed from https://ideas.repec.org/a/kap/iaecre/v6y2000i3p461-47410.1007-bf02294965.html
   My bibliography  Save this article

The incentive effect in share contracts: The case of finite resources

Author

Listed:
  • Geoffrey Black

Abstract

Using share contracts is a universal response to exchange under uncertainty. However, the benefits of share payments are tempered by their negative moral hazard incentive effects. By incorporating geological considerations into the producer's wealth-maximizing decision problem, this paper demonstrates these incentive effects in the case of nonrenewable resources. This paper also develops an expression for estimating the size of the incentive effects in the case of petroleum production. This expression shows that underproduction is a function of the royalty rate used and certain reservoir characteristics that can be easily estimated from publicly available data. Using such data, this paper demonstrates that such production loss can be a significant portion of cumulative production. Copyright International Atlantic Economic Society 2000

Suggested Citation

  • Geoffrey Black, 2000. "The incentive effect in share contracts: The case of finite resources," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 6(3), pages 461-474, August.
  • Handle: RePEc:kap:iaecre:v:6:y:2000:i:3:p:461-474:10.1007/bf02294965
    DOI: 10.1007/BF02294965
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/BF02294965
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: https://libkey.io/10.1007/BF02294965?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Cheung, Steven N S, 1969. "Transaction Costs, Risk Aversion, and the Choice of Contractual Arrangements," Journal of Law and Economics, University of Chicago Press, vol. 12(1), pages 23-42, April.
    2. Reid, Joseph D, Jr, 1976. "Sharecropping and Agricultural Uncertainty," Economic Development and Cultural Change, University of Chicago Press, vol. 24(3), pages 549-576, April.
    3. Joseph E. Stiglitz, 1974. "Incentives and Risk Sharing in Sharecropping," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(2), pages 219-255.
    4. Yoram Barzel, 1997. "Measurement Cost and the Organization of Markets," Chapters, in: Svetozar Pejovich (ed.), The Economic Foundations of Property Rights, chapter 13, pages 171-192, Edward Elgar Publishing.
    5. Raphael Amit, 1986. "Petroleum Reservoir Exploitation: Switching from Primary to Secondary Recovery," Operations Research, INFORMS, vol. 34(4), pages 534-549, August.
    6. Robert J. Kalter & Thomas H. Stevens & Oren A. Bloom, 1975. "The Economics of Outer Continental Shelf Leasing," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 57(2), pages 251-258.
    7. Garen, John E, 1994. "Executive Compensation and Principal-Agent Theory," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1175-1199, December.
    8. Leffler, Keith B & Rucker, Randal R, 1991. "Transactions Costs and the Efficient Organization of Production: A Study of Timber-Harvesting Contracts," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 1060-1087, October.
    9. Martin Gaynor & Paul Gertler, 1995. "Moral Hazard and Risk Spreading in Partnerships," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 591-613, Winter.
    10. Black, Geoffrey & LaFrance, Jeffrey T., 1998. "Is Hotelling's Rule Relevant to Domestic Oil Production?," Journal of Environmental Economics and Management, Elsevier, vol. 36(2), pages 149-169, September.
    11. Rucker, Randal R & Leffler, Keith B, 1988. "To Harvest or Not to Harvest? An Analysis of Cutting Behavior on Federal Timber Sales Contracts," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 207-213, May.
    12. Otsuka, Keijiro & Chuma, Hiroyuki & Hayami, Yujiro, 1992. "Land and Labor Contracts in Agrarian Economies: Theories and Facts," Journal of Economic Literature, American Economic Association, vol. 30(4), pages 1965-2018, December.
    13. Allen, Douglas & Lueck, Dean, 1992. "Contract Choice in Modern Agriculture: Cash Rent versus Cropshare," Journal of Law and Economics, University of Chicago Press, vol. 35(2), pages 397-426, October.
    14. Hayne E. Leland, 1978. "Optimal Risk Sharing and the Leasing of Natural Resources, with Application to Oil and Gas Leasing on the OCS," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 92(3), pages 413-437.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Youmanli Ouoba, 2023. "Testing the necessary conditions for sustainability in the mining sector in Burkina Faso," Mineral Economics, Springer;Raw Materials Group (RMG);Luleå University of Technology, vol. 36(1), pages 1-12, January.
    2. Geoffrey Black, 2002. "A transaction cost model of contract choice: The case of petroleum exploration," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 8(3), pages 235-247, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Geoffrey Black, 2002. "A transaction cost model of contract choice: The case of petroleum exploration," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 8(3), pages 235-247, August.
    2. Ackerberg, Daniel A. & Botticini, Maristella, 2000. "The Choice of Agrarian Contracts in Early Renaissance Tuscany: Risk Sharing, Moral Hazard, or Capital Market Imperfections?," Explorations in Economic History, Elsevier, vol. 37(3), pages 241-257, July.
    3. Hensher, David A. & Ho, Chinh & Knowles, Louise, 2016. "Efficient contracting and incentive agreements between regulators and bus operators: The influence of risk preferences of contracting agents on contract choice," Transportation Research Part A: Policy and Practice, Elsevier, vol. 87(C), pages 22-40.
    4. Laurence Amblard & J.P. Colin, 2009. "Reverse tenancy in Romania: Actors' rationales and equity outcomes," Post-Print hal-00454533, HAL.
    5. Hongyun Han & Hanning Li, 2018. "The Distribution of Residual Controls and Risk Sharing: A Case Study of Farmland Transfer in China," Sustainability, MDPI, vol. 10(6), pages 1-20, June.
    6. Jun Yeong Lee & Grant Durbahn & Peter F. Orazem & Wendong Zhang, 2023. "The roles of risk preferences, selection, and uncertain returns on land contracts," Agricultural Economics, International Association of Agricultural Economists, vol. 54(2), pages 220-233, March.
    7. Elliott, Matthew & James, Harvey Jr., 2013. "Nature Of The Farm: Revisited," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150726, Agricultural and Applied Economics Association.
    8. Wang, Sen & Bogle, Tim & van Kooten, G. Cornelis, 2012. "Forestry and the New Institutional Economics," Working Papers 130818, University of Victoria, Resource Economics and Policy.
    9. Vassalos, Michael & Li, Yingbo, 2016. "Assessing the Impact of Fresh Vegetable Growers’ Risk Aversion Levels and Risk Preferences on the Probability of Adopting Marketing Contracts: A Bayesian Approach," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association, vol. 19(1), pages 1-18, February.
    10. Sen, Debapriya, 2011. "A theory of sharecropping: The role of price behavior and imperfect competition," Journal of Economic Behavior & Organization, Elsevier, vol. 80(1), pages 181-199.
    11. Yoder, Jonathan & Hossain, Ishrat & Epplin, Francis & Doye, Damona, 2008. "Contract duration and the division of labor in agricultural land leases," Journal of Economic Behavior & Organization, Elsevier, vol. 65(3-4), pages 714-733, March.
    12. Olmos, Marta Fernández & Grazia, Cristina & Perito, Maria Angela, 2011. "Quality and Double Sided Moral Hazard in Share Contracts," Agricultural Economics Review, Greek Association of Agricultural Economists, vol. 12(1).
    13. Debapriya Sen, 2005. "Sharecropping, interlinkage, and price variation," Department of Economics Working Papers 05-10, Stony Brook University, Department of Economics.
    14. Burnett, J. Wesley & Szmurlo, Daniel & Callahan, Scott, 2024. "Farmland Rental and Conservation Practice Adoption," Economic Information Bulletin 341821, United States Department of Agriculture, Economic Research Service.
    15. Yoder, Jonathan & Hossain, Ishrat & Epplin, Francis & Doye, Damona, 2008. "Contract duration and the division of labor in agricultural land leases," Journal of Economic Behavior & Organization, Elsevier, vol. 65(3-4), pages 714-733, March.
    16. Eggertsson, Thrainn, 1998. "Sources of Risk, Institutions for Survival, and a Game against Nature in Premodern Iceland," Explorations in Economic History, Elsevier, vol. 35(1), pages 1-30, January.
    17. Dubois, Pierre, 2002. "Moral hazard, land fertility and sharecropping in a rural area of the Philippines," Journal of Development Economics, Elsevier, vol. 68(1), pages 35-64, June.
    18. Corrado Di Maria & Ian A. Lange & Emiliya Lazarova, 2014. "A Look Upstream: Electricity Market Restructuring, Risk, Procurement Contracts and Efficiency," CESifo Working Paper Series 5124, CESifo.
    19. Aggarwal, Rimjhim M., 2007. "Role of risk sharing and transaction costs in contract choice: Theory and evidence from groundwater contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 63(3), pages 475-496, July.
    20. Raul V. Fabella, 2016. "Why Fixed Rent Contracts are Less Prevalent: Weak Third Party Enforcement and Endogenous Principal Type," UP School of Economics Discussion Papers 201606, University of the Philippines School of Economics.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:iaecre:v:6:y:2000:i:3:p:461-474:10.1007/bf02294965. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.