Moral Hazard, Costly Supervision, and Agricultural Mechanization

The principal-agent relationship between the farmer and the laborer was explored to show how moral hazard is inherent in the casual labor contract and causes demand for supervision services. Moral hazard occurs when 2 parties to a contract have unequal access to information, enabling one to effect the outcome without the other knowing it. The data were from farmers in 3 cities in Laguna in the Philippines. Modern rice varieties were introduced in the area in 1966, and yields increased, making it more difficult to supervise the harvest. This was accompanied by changes in the labor contract for harvesting-threshing. When threshing machines were introduced, they were adopted by farmers enthusiastically, even in the absence of any cost advantage for mechanized methods. The evolution of labor contracts, including mechanization, was characterized by a growing reduction in supervision costs. It was found that mechanization reduces supervision requirements by cutting down labor input and lowering the laborer's control over the production process. This reduces the moral hazard of the laborer misrepresenting the quantity and quality of output produced.