I am currently in Pittsburgh for the annual meetings of the Agricultural and Applied Economics Association (AAEA). Pittsburgh is a beautiful city, and I am glad I flew in early. On Sunday, I visited the Warhol Museum, which made me gain a whole new appreciation for the work of Andy Warhol.
I am here because I was asked to talk in a session on impact evaluation, which will be the topic of a post later this week. I am also here because Zack Brown and I won the award for Oustanding American Journal of Agricultural Economics Article for our article titled “On the (Mis)Use of Wealth as a Proxy for Risk Aversion.” Here is the abstract of the paper:
“Tests of risk sharing in the contracting literature often rely on wealth as a proxy for risk aversion. The intuition behind these tests is that since contract choice is monotonic in the coefficients of risk aversion, which are themselves assumed monotonic in wealth, the effect of a change in wealth on contract choice is clearly identified. We show that tests of risk sharing relying on wealth as a proxy for risk aversion are only identified insofar as the econometrician is willing to assume that (i) the principal is risk-neutral or her preferences exhibit CARA; and (ii) the agent is risk-neutral.”
It is a pretty technical paper but in short, we show that one cannot control for risk aversion between parties to a contract (i.e., the principal and the agent) by using their respective wealth or income levels as a proxy for their risk preferences.
Why was this published in the top journal in the field of agricultural economics, you may ask? The idea behind this paper came from a proof in my dissertation (for which I won the AAEA’s Outstanding Doctoral Dissertation award, incidentally). The first two essays in my dissertation were about sharecropping, which probably constitutes the archetypal principal-agent problem (the first fully worked out principal-agent model was in Stiglitz’ seminal 1974 paper on sharecropping). The study of agrarian contracts has been a fruitful research topic in agricultural economics over the years.