By: Allen, Douglas W.; Lueck, Dean
In a dynamic contracting environment, increasing standards over time in light of past performance is known as the ratchet effect. Despite the recent theoretical attention given to the ratchet effect, models that include these effects have not been empirically tested against contract data. In this study, we use farm-level data on modern Great Plains agricultural cash rent and cropshare contracts to test for the presence of ratchet effects in the context of a principal-agent model with moral hazard. We find limited evidence for the ratchet effect within share contracts, and no evidence that it is important for the choice of contract between cash rent and cropshare.