WHAT DO TEENAGE ice-cream scoopers, taxi drivers, door-to-door salesmen, and peasant day laborers all have in common? The answer is, at least at work, they all can be difficult to monitor and motivate. Economics considers a fundamental problem in which a principal, who needs a task carried out, hires an agent to carry out the task. The problem is that once the agent is hired, the agent's interests may not match those of the principal. As any supervisor of human resources can attest, a hired worker left unmonitored and unmotivated is a worker tempted by the twin evils of sloth and self-indulgence. The labor supervision problem is a definitive example of moral hazard, the incentive for an agent to act in his own interest rather than the interest of the principal when the agent's actions are hidden. As a result of moral hazard in labor markets, the principal may never offer a labor contract in the first place unless he can design a contract that sufficiently lines up the agent's incentives with his own.

In this chapter, we will examine three different types of contracts between principals and agents: fixed-wage, fixed-rent, and share contracts. We will explore how these different types of contracts address the issues of moral hazard and risk sharing in the context of some industrialized country labor market examples, and then analyze how they shape the agrarian institutions that order rural economic life in developing countries.