A Test for Moral Hazard in the Labor Market: Contractual Arrangements, Effort, and

Health
Author(s): Andrew D. Foster and Mark R. Rosenzweig
Source: The Review of Economics and Statistics , May, 1994, Vol. 76, No. 2 (May, 1994),
pp. 213-227
Published by: The MIT Press

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 The Review of Economics and Statistics
VOL. LXXVI MAY 1994 NUMBER 2

CONFERENCE ANNOUNCEMENT

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A TEST FOR MORAL HAZARD IN THE LABOR MARKET:

CONTRACTUAL ARRANGEMENTS, EFFORT, AND HEALTH

Andrew D. Foster and Mark R. Rosenzweig*

Abstract-Moral hazard plays a central role in many models
depicting contractual relationships involving worker effort.
We show how time-series information on worker health, con-
sumption and work time can be used to measure the effort
effects of payment schemes. Estimates from longitudinal data
describing farming rural households indicate that time-wage
payment schemes and share-tenancy contracts reduce effort
compared to piece-rate payment schemes and on-farm em-
ployment. The evidence also indicates, consistent with moral
hazard, that the same workers consume more calories under a
piece-rate payment scheme or in on-farm employment than
when employed for time wages.
M /[ORAL hazard plays a central role in many
models depicting contractual relationships
or payment schemes involving the supply of
worker effort, particularly in the context of low-
income countries. Among the most prominent of
these are sharecropping, efficiency wages, and
permanent worker contracts (e.g., Stiglitz, 1982;
Eswaran and Kotwal, 1985a and 1985b). The exis-
tence of moral hazard also has been used to
Received for publication June 20, 1992. Revision accepted
for publication March 22, 1994.
* University of Pennsylvania.
This research was supported in part by NICHD Grant No.
HD-28687. We are grateful to two referees for helpful com-
ments.
justify the superiority of family labor over hired
labor paid on a time basis, and hence the relative
cost advantage of small-scale farms. Despite the
theoretical importance of moral hazard and the
distinction between worker time and worker ef-
fort, however, there is little direct empirical evi-
dence on worker shirking. The reason for this is
clear, the hypothesized feature of these models
that deters workers from supplying full effort, the
lack of observability by the employer of worker
effort, also represents a barrier to the empirical
verification of the importance of moral hazard,
namely the unobservability to the researcher of
worker performance.
While there have been credible studies of the
disincentive effects of input use associated with
share tenancy (Bell, 1977; Shaban, 1985), this
evidence is based on the withholding of readily
measured inputs such as fertilizer, seeds and
worker time. There is no evidence on the with-
holding of worker effort, given worker labor time,
due to the lack of full incentives. In this paper,
we show how time-series information on worker
health and the inputs to worker health can be
used to measure the effort effects of different

Copyright C) 1994 [ 213 1

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 214 THE REVIEW OF ECONOMICS AND STATISTICS
labor payment schemes. In particular, we make
use of the biological balance equation in which
calorie intake and energy expenditure determine
weight (body mass) change. The basic idea is that
the loss of worker body mass, for given calorie
intake, should vary directly with the degree to
which the worker appropriates his/her contribu-
tion to output if there is moral hazard. Similarly,
calorie intake, which can be directly measured
but is not necessarily information known by the
employer, may also be positively related to worker
effort incentives. A study of these relationships
between payment schemes, calorie intake and
health may also help illuminate the conflicting
results from studies of the effects of calories
and/or health status on worker wages and contri-
butions to output (e.g., Strauss (1986), Behrman
and Deolalikar (1989), Deolalikar (1988) and
Schultz (1992)).
In section I we set out a simple model in which
individuals work in different activities that dif-
ferently reward worker effort and in which worker
health is affected by effort and food intake. The
model is used to show how the relationship be-
tween reward schemes and unmeasured effort
can be inferred from health and calorie informa-
tion and to derive the relationship between calo-
rie intake and worker incentives. In section II
we describe the data used. These data, from
Bukidnon, Philippines, provide longitudinal body
mass, individual calorie intake and wage informa-
tion on workers who work for time wages, on
their own plots of land, under share tenancy and
for piece-rate wages in a setting in which these
different reward schemes are offered for the same
agricultural tasks. We also discuss estimation is-
sues and specification of the tests for moral haz-
ard derived from the model. The empirical re-
sults are reported in section III. The estimates
indicate that time-wage payment schemes as well
as share-tenancy are associated with moral haz-
ard. In particular, workers evidently supply more
effort under a piece-rate payment scheme or in
own-farm work compared to time-wage employ-
ment as reflected in the fact that they deplete
their body mass by approximately 10% more, net
of calorie consumption, when working under a
piece-rate scheme or on their own plots of land
compared to working as time-wage workers and
13% more than when working under share ten-
ancy or when outside of the labor force. The
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evidence also indicates that calorie intake is re-
warded when workers work for piece-rates but
not when workers work for time wages and that
the same worker consumes 23% (16%) more
calories per day when employed under a piece-
rate payment scheme (on-farm employment) than
when employed for time wages, also consistent
with the energy expenditure implications of moral
hazard.
I. Theory
A. Worker Effort
The hypothesis of moral hazard applied to the
labor market is that the amount of an input
supplied by a worker to a task will depend posi-
tively on the extent to which that input is re-
warded. This will in turn depend on the degree to
which the employer can monitor or observe the
input. Worker effort is one example of an imper-
fectly perceived input from the perspective of the
employer whose supply, for given work time, will
depend positively on the degree to which it is
rewarded.' Another is the consumption of the
worker, which may also influence productivity.
While it is possible for the researcher to measure
directly worker consumption to evaluate the ef-
fects of moral hazard, at some expense, worker
effort is not likely to be easily observed by either
employers or researchers.
The key feature of the analysis that follows is
that worker effort, although unobservable, di-
rectly influences the health of a worker, which
has measurable components, net of caloric in-
take, time spent working, and illness. In particu-
lar, it is assumed that there is a health production
function:
Hit =h( Hit- cit, zit S fit)(l
where Hit is a measure of the body size of
individual i at time t, Cit is nutrient intake, zit iS
illness in that interval, and fit is total effort
expended between periods t - 1 and t, where
the total amount of effort expended can be writ-
ten
fit = Ejtljt (2)
j E=_
1 Note the distinction betwe
amount of work done (e.g., the number of bushels of corn that
are picked), and effort, which may be thought of as the
amount of energy expended per day.
 MORAL HAZARD IN THE LABOR MARKET 215

where j indexes the different reward schemes of and p,3,8 denote the Lagrange multipliers at time
the activities undertaken by individual i, lIit is the t associated with the health production function
number of days spent doing activity j, and ejit is(1) and the budget constraint (4), respectively,
the effort expended per day under payment and assuming for simplicity that workers have
scheme J. positive employment in all schemes3 the first or-
Because effort is not directly observable, esti- der conditions are:
mation of equation (1) requires that we derive an
expression for the effort that each individual will
expend as a function of observable (to the re- uct + At E wjcliit) -Pt)IthcLh = 0 (6)
searcher) characteristics of the worker as well as
Uf tljit + At(Wjej t)ljit + Iithf,tliit = 0 (7)
the payment scheme. It is assumed that payment
schemes can be characterized by a function Ufi ekit + AtWk -thftekit ? (8)
wjit =wj( Hit -1, cit, ejit ) (3) UHIt + At+1 H ( t+l jit+l
jeJ

where wjit is the daily earnings of individual

+ ?t -i At+lhHit8 = 0 (9)
under contract j. The extent to which effort is
At-At_1(1 + r)f3 = 0. (10)
rewarded is determined by Wje = 9wl/de. Be-
cause effective work is fully rewarded in piece-rate Equations (7) and (8) may be solved to obtain an
work or in self-cultivation, it is expected that for effort supply function by payment regime. In par-
a given level of health and consumption wie will ticular, these two equations imply that effort in
be higher under these schemes than in share- sector k will be chosen to equate the marginal
cropping and time-wage employment. and average products of effort in that regime
Effort by payment scheme, labor allocation, (Wke = wk/ek). Because daily earnings in a given
and calorie consumption are determined as a regime depend only on effort, consumption and
solution to a dynamic optimization problem. For health, this latter equation implies that the maxi-
simplicity, we assume that individuals may borrow mizing choice of effort under scheme k can be
and lend as much as they want at a fixed interest written as a function of health and calories alone.
rate r so that net assets in period t + 1 are Since the marginal products of effort in the dif-
ferent regimes must also be equal (an implication
Ait+1 = (1 + r)Ait + Ew1J. -PL ci. of
(4)
equation (7)), the effort under regimes other
jfEJ
than k may also be written as a function of effort
Each individual has a felicity function that is under regime k, consumption and health and
increasing in body size and consumption and de- thus on consumption and health alone, that is,
creasing in total effort expenditure U(Hit, Cit, fit)
and he/she chooses consumption, effort, and days
ejit = ej( Hit -1, cit). *(11)
worked in order to maximize discounted utility: Moreover, if effort is rewarded more under
T scheme j than under some scheme j' (i.e., Wie >
max E f3sU(His,cis,fis) (5) Wj,e) and the wage is concave in effort over the
c1s, e,lsX ljls s = O relevant range, effort in regime j must exceed
that in j'.
subject to equations (1)-(4) and the health pro-
Substituting equation (11) into (1) and taking a
duction function. We assume that there is at least
linear approximation around H*, c*, and l* gives
one payment scheme, indexed by k, for which
labor demand is perfectly elastic.2 Letting A t3t Hit= ao + allHHitl + azzit
+ accit + E aIjljit + UHit
2Although labor supply in self-cultivation and share-crop- jeJ
ping may be constrained, workers are likely to have consider-
able liberty with regard to their choice of the number of days
spent in off-farm employment. If an individual's labor supply 3 The requirement that there is positive employment in all
were to be constrained in all work regimes then the optimal schemes is made primarily for notational convenience. As
effort expended will in general depend on the marginal utility long as the individual chooses positive employment in scheme
of income and thus estimation of the modified health produc- k, the analysis is unchanged except for the fact that the effort
tion function (equation (11) below) would be substantially functions will only be defined for those schemes in which
more complicated. labor activity is positive.

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 216 THE REVIEW OF ECONOMICS AND STATISTICS
where
alj = hf.,ej
aH= hHit-1 + E dH IJit (12)
and
de.
ac =hclt + L dc iJ*t
jedCJ it
Of particular interest are the coefficients on the
aij terms, which provide measures of the effort Ucit= Apt7kit (13)
expended in task j. Given an a priori ranking of
n payment schemes by the degree to which they
reward effort, from lowest to highest, the test of
moral hazard is that a1l < a12 ... < ain < 0.
B. Calorie Consumption
The above analysis indicates that to identify
the presence of moral hazard with respect to
work effort based on changes in worker health
requires measurement of the calorie intake of the
worker among other worker characteristics. Infor-
mation on this variable also permits another test
of the role of moral hazard. If caloric intake is
also not readily known by employers but is associ-
ated with worker productivity, either because it
directly augments the amount of effective work
done by an individual (as suggested by the wage
equation (2)) or because workers who expend
greater effort are likely to consume more in order
to maintain their health, then the allocation of
consumption across periods may also be related
to payment schemes due to moral hazard. In
particular, in periods when individuals are work-
ing primarily in piece-rate activities one should
expect to observe elevated levels of consumption.
On the other hand, in periods when individuals
are primarily working for time wages we should
expect to see low levels of consumption.
A standard approach to the analysis of the
intertemporal allocation of consumption is to de-
rive Euler equations for consumption from a dy-
namic stochastic model. Unfortunately, imple-
mentation of this approach is greatly complicated
by the fact that body size at a given point in time
depends on previous body size. As a result, calo-
rie allocations in one period will depend on fu-
ture as well as present labor-market returns to
nutrition.
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In order to use the above model to obtain a
tractable empirical test of whether calorie alloca-
tions are a function of the incentive schemes of
work activities, it is therefore necessary to make
an important simplifying assumption: the single-
period utility function is assumed to depend only
on body size Hi, and consumption cit. Thus,
energy expenditure only leads to a decrease in
utility to the extent that it lowers body size. This
assumption allows us to combine equations (6)
and (8) to obtain
where
7rkit Pt h ~~ ' E wjcitljit (14)
ekit hfit jE.J
and k indexes the payment regime in which labor
demand is assumed to be elastic. The interpreta-
tion of equations (13) and (14) is that the marginal
utility of calorie consumption in any particular
period must equal the marginal utility of wealth
in that period times a shadow price that reflects
the net cost of increasing calorie consumption
and work in payment regime k in such a way as
to keep health unchanged. Equation (13) for two
different periods may then be combined with
equation (10) to obtain a Euler equation
Ucit 7rkit
8i (1 + r) vkt(15)
ucit + 1 7rkit + 1
In order to derive an estimable form for equa-
tion (15) it is helpful to further simplify the wage
and health technologies as follows:
U(cit, Hit) = 1l CtYCH[yH
h(Hit_ 1, cit, fit) = h(Hit- 1, Ocit -fit)
wj( Hit_ 1, cit, ejit) = mj( Hit 1) nj(6cjcit + ejit
(16)
We also assume that sector k is the time-wage
sector and that calories are not rewarded in that
sector (i.e., 8ck = 0), and thus that ekit does not
vary across individuals or over time.4 Thus a
log-linear approximation to equation (15) in cit,
Pto Wkit, and 1jit around c*, p , wk, and 17,
4 Evidence that calories are not rewarded in the time-wage
sector is presented below.
 MORAL HAZARD IN THE LABOR MARKET 217

respectively, yields holds in Bukidon in northern Mindanao, Philip-

1 pines where, as is typical of agriculture in the
Alnci t-ln(I3(1 + r)) Philippines, individuals work not only on their
YC
own or rented (shared-in) plots of land but in the
YH1
+ -A In Hit --A In pt labor market under both piece-rate and time-wage
YC YC payment schemes.7 These households, whose
principal crops are corn, rice and sugar cane,
1Wk* (0 + were
E interviewed
SCj1j*) in four rounds at four month

+- W 7*e8 ) A lnWki
intervals in 1984-85 as part of an International
Food Policy Research Institute study by Bouis
1 W* and Haddad (1990). In addition to detailed infor-
*k E 6 cj A lit (17)
YC kek ijeJ mation in each round on wages received, days

The key implication of equation (17) is that the
parameter estimates associated with the labor
supplied to each of the different reward schemes
reflect differences in the return to calories icS
Thus in periods when an individual allocates more
work to payment schemes for which the returns
to calories are higher he/she will also, ceteris
paribus, consume a greater amount of calories.
This result is the dynamic analogue to the result
worked, payment method, and activity type (e.g.,
harvesting, planting, weeding), there is informa-
tion for each household member on weight, height
and calorie intake based on the 24-hour recall
method.
Table 1 provides descriptive statistics for the
sample adults, aged 18 through 59, that we use
for analysis. Five types of contractual work ar-
rangements corresponding a priori to differing

in the static intrahousehold allocation model of effort incentives can be distinguished in the data
-piece-rate wages, under which workers receive
Pitt et al. (1990), although that model did not
all of the returns from their work; on-farm work,
distinguish work activities by their effort incen-
where about half of workers receive a full share
tives.
of their work and about half are working under a
II. Data share tenancy contract from which they typically
receive about 50% of the returns from their ef-
The above framework suggests that to test for
fort; agricultural time-wages, which are poten-
the existence and importance of moral hazard
tially subject to the most severe moral hazard,
associated with contractual arrangements, in the
and non-agricultural wages, which are also paid
absence of direct measures of worker effort, it is
on a time basis. As can be seen, a substantial
necessary to have longitudinal information on
number of sample individuals worked under
health, calorie intakes, and activities, differenti-
piece-rate and time-wage payment schemes; in-
ated by incentives regimes, for individual work-
deed, of adult workers in the sample households
ers. The data used in this analysis are from a
who contribute at least two observations to the
stratified6 random panel of 448 farming house-
labor market data (i.e., at the very least they
performed the same job in two different rounds
SNote that the fact that the marginal product of effort is
equated across the different schemes implies that wj,/8j, will or different jobs in the same or different rounds),
also be equated across schemes given the specification for 70.7%wj of men and 67.7% of women worked both
in equation (16).
6 The sampling frame for the survey stratified barrios (vil-
for piece-rate and time wages. Men evidently
lages) into three classifications-those in which households spend more time in the wage labor market, but
were mostly engaged in corn production, those in which are substantially more likely to work for time
households were mostly engaged in sugar cane production,
wages than for piece-rates compared to women.
and those barrios in which both corn and sugar were pro-
duced. These strata were formed on the basis of the distance
of the barrios from a sugar cane mill. Within these strata,
households and barrios were selected on a random basis. 7Although we focus on the distinction between piece-rate
Despite the stratification, the information on primary occupa-and time-wage earnings, there is some heterogeneity in the
tions provided by respondents indicates that 63% of the heads form of payment within each type of work. Piece-rates include
of households in the sample were engaged in corn production, cash payments on a unit basis as well as in-kind payments that
8% were engaged in rice production, and only 6% were are a share of the harvest. It should also be noted that the
engaged in sugar production, as either landowners, tenants or appropriate unit to be used in the piece-rate payment for
laborers (Bouis, 1984). plowing or weeding may, for example, be the plot of land.

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 218 THE REVIEW OF ECONOMICS AND STATISTICS

TABLE 1.-DESCRIPTIVE STATISTICS

Men Women
(N= 458) (N= 494)

Mean Std. Dev Mean Std. Dev.

Fraction of people working

during study period in:
Piece-rate 0.423 0.495 0.240 0.428
Time-wage 0.581 0.494 0.194 0.396
On-farm 0.530 0.500 0.367 0.482
Non-agric. 0.366 0.482 0.251 0.434
Fraction of total days
worked in:
Piece-rate 0.052 0.156 0.014 0.065
Time-wage 0.125 0.260 0.020 0.091
On-farm 0.128 0.260 0.042 0.151
Non-agric. 0.157 0.331 0.126 0.313
Calories 2609.6 990.2 2160.0 861.5
Body-mass index (kg/meter2) 20.17 1.963 20.64 2.815
Illness (fraction days) 0.033 0.144 0.045 0.175
Height (cm) 160.7 6.163 150.1 5.491
Education (years completed) 5.903 5.104 6.581 6.760
Land owned (hectares) 2.253 3.830 1.953 3.458

This is due in part to the fact that piece-rates are
predominantly paid in harvesting, a labor-inten-
sive activity that employs a higher proportion of
women compared to other activities, although
piece rates are also paid in other activities-for
example, 23% of all plowing days are paid ac-
cording to piece rates.8
As in other data sets from low-income coun-
tries reporting individual calorie consumption
(e.g., Pitt et al., 1990), men consume significantly
more calories on average than do women, a dif-
ferential that may in part be explained by the
greater labor-force activity of men. Women also
report that they are ill more often than do the
men. We use a measure of health that is sensitive
to short-run consumption and work activity, the
body mass index (BMI), weight divided by height
squared. This measure, as can be seen in table 1,
is approximately the same on average for men
and women, with men being on average 7% taller
than women.
We estimate the health or BMI production
function over the four-month period correspond-
8 Within tasks, payment form appears to be related to the
size of the farm operated by the employer due to evident scale
economies in hiring supervisors of piece-rate workers (Foster
and Rosenzweig, 1992).
ing to a survey round using as determinants the
fraction of total days in that period spent by the
worker in each of the five contractual regimes,
calories consumed in the survey day, the fraction
of days that the individual reported that he or she
was ill in the round (based on a two-week refer-
ence period), sex, age and previous-period BMI.
We also include in the specification dummy vari-
ables for the ten municipios, which will capture
differences across households in the local health
infrastructure and environment (e.g., water qual-
ity, sanitation).
To estimate the health production function, it
is necessary to take into account the possibility
that activities, differentiated by contractual terms,
and thus by effort expended, and calories are
allocated according to unmeasured health-related
endowments, as found in Pitt et al. (1990). More-
over, illness is not likely to be orthogonal to
unobserved healthiness, nor is the initial-period
BMI, and calories consumed in the 24-hour recall
period measure with error the average consump-
tion of calories over the round, which is approxi-
mately three months. Accordingly, both to take
into account the measurement error in the calo-
rie variable and the endogeneity of the activity
and health variables, we estimate the health
(BMI) production function using two-stage least-
squares, where we employ variables reflecting
household budget constraints-household wealth

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 MORAL HAZARD IN THE LABOR MARKET 219
and area-specific prices-as instruments, includ-
ing the land owned by the household, the age and
sex composition of the household (which affects
the allocation of household resources to each
individual in the household), the height of the
individual, the price of corn (the principal com-
modity for which there is price information for
each area and round), and round and municipio
dummy variables, which reflect locale-specific la-
bor market conditions and consumption prices.9
To make use of as much of the sample infor-
mation as possible, we use all observations on
individuals in which there is adjacent-period in-
formation on BMI, as well as information on the
other variables. For most individuals, therefore,
we have three observations (one round is lost
because of the use of lagged-BMI in the specifi-
cation), although some rounds are missing for
some individuals, mainly due to lack of informa-
tion on BMI for consecutive periods or on calorie
consumption. The total number of observations
from which the production function could be
estimated is 2274. To take into account the non-
independence of the observations, we employed
an ARl-error scheme. We report the estimated
error correlations, which differ by specification,
below.
III. Estimates
A. Determinants of BMI.
Table 2 reports the estimates of the BMI pro-
duction function (equation (12)).1o The first col-
umn of the table reports the OLS-AR1 estimates
in which we do not distinguish between self-
cultivation on own land or cultivation under share
tenancy. These estimates, which are rejected by
the Hausman-Wu test, indicate that, net of calo-
rie consumption, time-wage work depletes body
fat no less than do self-cultivation and wage work
under piece-rates. The OLS estimates also indi-
cate that calories do not significantly augment
9 The instrumental-variables method will result in consistent
estimates as long as the measurement errors in calorie con-
sumption are random.
10 We omit from the table all of the municipio dummy
variable coefficients. In all specifications, the set of municipio
variables is statistically significant. We also tested whether or 59.0% of the days spent in harvest work by paid
not the set of production function coefficients differed by sex.
The (preferred) two-stage estimates indicated that we could
not reject the hypothesis that the health production function
is the same for both men and women (F(17,2238) = 0.67).
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body mass and that participation in non-agricult-
ural work actually increases BMI net of calorie
consumption compared to the left out non-labor-
force activity! Indeed, the results are sensible
only when two-stage least squares, which is pre-
ferred statistically, is used, as reported in the
subsequent columns. In all specifications esti-
mated by the two-stage procedure, increases in
calories, net of activities, increase BMI and ill-
ness depletes BMI. Moreover, in column 2, where
we replicate the OLS specification, the ordering
of the deleterious effects of work on BMI con-
forms to the a priori ranking of the potential
moral hazard entailed by the different work ar-
rangements, with piece-rate work depleting BMI
by substantially more than the next most effort-
intensive payment scheme, on-farm work (some
of which is on a share basis), and with time-wage
agricultural or non-agricultural work not dimin-
ishing BMI more than the reference non-labor-
force activity.
In column 3, we report the estimates obtained
when we decompose the self-cultivation activity
into share-tenancy and own-cultivation by adding
a variable that is self-cultivation multiplied by the
share of the farmer's total cultivated land that is
farmed under share tenancy. If share tenancy
reduces effort, then the coefficient on this vari-
able should be positive. The estimates confirm
this, and indicate that the negative effect on body
mass of self-cultivation on own or fixed-rent land
is no different from that of piece-rate wage work
(F(1, 2255) = 1.63), while work effort is evidently
substantially less in time-wage activities and un-
der share tenancy cultivation compared to either
piece-rate or own cultivation. The significantly
higher effort observed under piece-rate compared
to self-cultivation observed in the second-column
estimates is evidently due to the high proportion
of cultivators in the sample working as share
tenants and the reduced incentives of that con-
tractual form.
In the fourth column we test whether the sig-
nificantly greater negative effect of work on BMI
elicited by a piece-rate regime or in self-cultiva-
tion compared to time-wage work is due to dif-
ferences in the type of work activity. For example,
laborers were paid under a piece-rate scheme,
while only 14.6% of paid labor days in weeding
were compensated under a piece-rate regime. If
220 THE REVIEW OF ECONOMICS AND STATISTICS

TABLE 2.-LEAST SQUARES AND Two-STAGE LEAST SQUARES ESTIMATES

WITH AR1 ERRORS OF BODY-MASS INDEX (BMI) PRODUCTION FUNCTION'

OLS TSLS

1 2 3 4 5

Piece-rate workb -0.175 - 3.36 - 3.33 -4.49 -4.78d

(0.95)c (2.48) (2.47) (2.36) (2.52)
On-farm workb - 0.206 -1.28 -1.57 -2.00 - 1.90d
(1.33) (2.86) (3.08) (3.22) (2.57)
On farm work x 1.12 0.900 1.49d
fraction (1.17) (0.88) (1.00)
sharecroppedb
Time-wage workb - 0.155 - 0.0682 - 0.464 - 1.04 - 0.150d
(1.29) (0.10) (0.60) (1.13) (0.10)
Non-agric. workb 0.144 - 0.382 - 0.406 - 0.249 -0.622d
(2.19) (1.40) (1.50) (0.83) (1.35)
Calories (x 10-3)b 0.0112 0.146 0.135 0.151 0.0613d
(0.44) (1.39) (1.29) (1.30) (0.39)
Illness - 0.0327 -0.149 -0.144 -0.116 -0.108
(3.64) (2.50) (2.42) (1.76) (1.62)
Lagged BMIb 0.912 0.948 0.948 0.936 0.820e
(11.4) (44.5) (44.7) (39.1) (10.3)
Harvesting b -0.175
(0.48)
Harvest sugarb 1.78
(0.89)
Weedingb 0.878
(1.22)
Male -0.0527 0.0742 0.111 0.134 0.121
(1.13) (0.84) (1.18) (1.39) (0.84)
Hausman test:
F-test (7,2249) (8,2247) (11,2241) (14,2235)
3.67 3.41 2.73 4.72
P-value 0.0006 0.0007 0.0017 0.0001
a All specifications also include nine municipio dummy variables.
b Endogenous variable. Instruments include education, height, age, age squared, land, household composition
(age, sex groups), round and municipio dummy variables, and interactions of these variables with land. Work by
contractual arrangement and by task and illness measured as fraction of days in the previous four-month period.
c Absolute value of t-ratios in parentheses.
d Estimates of work activity, calorie and BMI effects and their t-ratios computed at the sample mean estimate of
BMI from specification in which all of these variables are interacted with lagged BMI.
e Estimate of lagged BMI effect and its t-ratio computed at the sample means of the work activity and calorie
variables.

harvesting is a more energy-intensive activity agricultural

than task variables are not jointly statisti-
weeding or other activities, then the differences cally significant (F(3,2252) = 0.69).
observed in BMI depletion by contractual terms All of the specifications reported in columns
may merely reflect differences in the energy- one through four assume that BMI depletion
intensity of work tasks. Variables reflecting the reflects energy expenditures equally for all indi-
proportion of days in the round (whether as a viduals. The nutrition literature (e.g., Sukhatme
wage laborer or self-employed) spent by the indi- 1977) suggests, however, that exertion rates, for
vidual in harvesting, in weeding and in harvestinggiven activities, and basal metabolic rates depend
inversely on weight. This implies that those indi-
sugar, alleged to be a particularly onerous activity
(Immink and Viteri, 1981), are thus added to the viduals with greater initial BMI will draw down
specification in column three. Although harvest their BMI more in any given activity than will
work is evidently a more energy-intensive activity,those with initially lower BMI, and the effect of
the results are essentially unchanged when the calories on BMI will also be less for those with
variables that also classify work activities by agri-initially greater BMI. Indeed, as might be the
cultural task are added to the specification; in- case if more rapid growth in one period resulted
deed, the joint F-test indicates that the three in less efficient growth in a subsequent period,

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 MORAL HAZARD IN THE LABOR MARKET 221
the estimates of the intrapersonal cross-period
correlations in residuals from all of the linear
specifications are negative and statistically signif-
icant, although not large (-0.10). To the extent
that BMI sorts people among activities differen-
tiated by payment schemes, as implied by our
results reported below, not taking into account
potential interactions between BMI and activities
in estimating the effects of the payment schemes
on BMI depletion could result in misleading in-
ferences.
In the last column of table 2 we report esti-
mates from a specification of the produc-
tion function in which all of the (endogenous)
payment-scheme variables and calories are inter-
acted with the lagged BMI variable. In this speci-
fication all but one of the six estimated interac-
tion coefficients were negative, consistent with
the hypothesis of homeostatic metabolism, and
the set of interaction terms is jointly statistically
significant (F(6,2249) = 3.48). We report in the
last column of table 2 the estimated effects of the
payment schemes and of calories implied by the
interactive specification at the sample mean level
of BMI; the reported BMI effect is that at the
sample mean values for the work activities and
calories. Although the estimated error-correla-
tion is positive (0.096) for this specification, sug-
gesting that the negative autocorrelation obtained
from the linear specifications arose from the
omission of the interactions between initial
body-mass and the efficiency of calorie consump-
tion and expenditure, the mean effects of the
payment schemes are not very different from
those obtained from the linear (instrumented)
specifications. In particular, consistent with the
existence of moral hazard in time-wage work and
in share tenancy, the estimates indicate that, net
of calorie consumption, for a worker with the
sample mean BMI employment under a piece-rate
payment scheme or self-cultivating entirely on
owned land over the survey period would dimin-
ish BMI by 23% and 9%, respectively, relative to
the omitted activity, non-labor force time, while
BMI would only be reduced (relatively) by 1% if
all work time was devoted to time-wage work.
The difference between the depletion of BMI
under the piece-rate and self-employment
schemes is not statistically different (F(1,2249) =
2.18), while that between piece-rate work and
either time-wage work or work under share ten-
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ancy are statistically different (F(1,2249) = 3.09
and 4.54, respectively). Work paid under share
tenancy, moreover, essentially depletes BMI no
differently than non-participation in the labor
force net of calorie intake."
B. Payment Method and the Return to Calories
The production function estimates indicate that
there is substantial moral hazard associated with
time-wage employment relative to piece-rate and
own-employment payment schemes with respect
to worker effort, as reflected in differential
scheme-specific rates of BMI depletion. The fact
that effort is not directly observable precludes the
direct estimation of the wage equation (2). How-
ever, it is possible to estimate directly whether
calories, which are also unlikely to be well-
observed by employers, are differentially re-
warded according to payment scheme. Because
effort under payment regime j may be written as
a function of caloric intake and health alone, we
may substitute equation (11) into equation (2) to
obtain a wage equation that depends only on
health and calories:
wjit =w(i_,c, j(Hit_l, COt)
= wj*(Hit_1, Cit). (18)
In order to assess whether calories and health
are differentially rewarded under piece and
time-rate wages we estimate equation (18) by
relating the difference between a worker's piece-
rate and time wages within the same survey round
to his/her calorie consumption, BMI, height, sex,
schooling, and age.12 The coefficients of this spec-
ification are thus the difference between the
piece-rate wage and time-wage coefficients in in-
dividual wage equations. If calories are not known
by employers then we would expect a positive
coefficient on calories. Coefficients on other vari-
ables will depend on the extent to which, on the
one hand, these variables are associated with
higher effort given caloric intake in piece-rate
work, in which case they will be positive, and on
11 Of course, the left out activity includes in some cases
household production. The results do not therefore imply that
"leisure" and work under time wages are equally onerous to
workers.
12 The price of corn may also affect wage rates if employers
use price as a signal of caloric intake, and is included in the
empirical specifications of (18).
 222 THE REVIEW OF ECONOMICS AND STATISTICS
the other hand they are used by employers using
a time-wage payment scheme as a signal of caloric
intake (in which case they will be negative). A
likely candidate for the latter would seem to be
BMI which is responsive to recent nutritional
intake (as is evident in table 2).
An advantage of the within-round estimation
procedure is that the existence of any worker
characteristics that are not measured in the data
but which are observed by employers, correlated
with the measured worker characteristics, and
have equal effects on piece-rates and time-wages
will not bias the estimates of the differential wage
effects of the measured characteristics. Because
calorie consumption and BMI may depend on
wages, however, two-stage least-squares is again
used. The instruments are land owned by the
household and round dummy variables. The sam-
ple consists of all individuals who worked under
both types of wage-payment regimes within a
single round, with one random round selected for
each worker among those with more than two
rounds in which he or she had worked for the two
wage types.
The weighted (by the number .of days in wage
activities) within-round, two-stage least-squares
estimates are reported in the first column of table
3.13 The estimates indicate, consistent with the
differential incentives associated with piece-rate
and time-wage payment schemes and with the
difficulty of monitoring calorie consumption and
effort, that calories are significantly more re-
warded when workers are paid on a piece-rate
basis than when they receive time-wages, while
observable BMI, which may be used by employers
as a signal for calorie consumption, is significantly
more rewarded under time wages than under a
piece-rate regime.14"5
13 The specification also includes municipio dummy vari-may be underestimated if such selection is not
ables.
14 These results may explain the finding in Behrman and
Deolalikar (1989), based on Indian data, that calories were
significantly more rewarded in the labor market during the
"peak" season while the opposite was true for weight-for-
height because in that setting piece-rate wages are almost
exclusively paid for harvest (peak-period) operations.
15The positive coefficients on height, male and schooling
tive work accomplished are higher for taller individuals than
level should not be interpreted in the same way as that on
caloric intake, because there is no reason to believe that
employers will have difficulty in measuring these variables.
Instead, as indicated above, these coefficients likely reflect the
fact that in equation (18) effort has been solved out. For
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In the second column of table 3 we report
estimates obtained from a specification which also
includes controls for crop and task. Controlling
for the within-round differences in tasks does not
affect the inferences about the effects of incen-
tives, although the precision of the differential
calorie effect is reduced. However, differences in
tasks also do not appear to significantly affect the
differential in piece-rate and time wages, net of
worker characteristics and the difference in pay-
ment regimes, and so are just adding random
noise to the specification and reducing estimation
efficiency.
The estimates of the differential effects of calo-
rie consumption on wage earnings under the two
payment schemes are based on a sample of work-
ers who were employed under both schemes in a
single four-month period. Although almost half
(47.1% based on all four rounds) of all wage
earners in a period worked under both regimes, it
is not likely that this is a random sample of all
workers, particularly because only 28% of all
sample individuals work for wages at all in a
round. Indeed, it would be expected, for example,
that workers with unobserved (by employers) pro-
ductivity-enhancing characteristics that are not
rewarded under a time-wage regime would tend
to specialize in either self-cultivation or piece-rate
work, while those with low levels of skills would
seek time-wage employment.16 Selection also may
apply to the group of workers under both pay-
ment methods; such workers are likely to be
those for whom differentials in rewards across
wage payment regimes are minimized. If calories
do increase piece-rate wages more than they do
time wages and workers are heterogeneous in
characteristics that affect their payment-method
reward differentials, the estimated effects of in-
creased calorie consumption on the difference in
earnings under piece-rate and time wage schemes
taken into account. This is because among work-
ers with high levels of calorie consumption, only
example, if the returns to additional effort in terms of effec-
these individuals will exhibit higher wages in piece-rate than
in time-wage employment.
16 In Foster and Rosenzweig (1993), evidence is presented
based on these data that a large component of worker skills is
not known by employers and that adverse selection is present:
 MORAL HAZARD IN THE LABOR MARKET 223

TABLE 3.-WEIGHTED Two-STAGE LEAST SQUARES ESTIMATES: WITHIN-ROUND

DIFFERENTIAL EFFECTS OF CALORIC CONSUMPTION AND BODY SIZE ON PIECE-RATE

MINUS TIME WAGES

Add Task and Selectivity- Selectivity-

Basic Sugar Harvesting Correction: Correction:
Variable Specificationa Controls Probit Multinomial Logit

Calories (X 10-3)b 0.311 0.215 0.317 0.347

(2.40)c (1.66) (2.55) (2.66)
BMIb -19.9 - 22.9 - 19.1 -17.2
(1.80) (2.28) (1.61) (1.36)
Height 1.38 1.56 1.33 1.24
(1.68) (1.82) (1.55) (1.42)
Male 0.477 0.361 0.483 0.506
(3.14) (2.18) (3.19) (3.28)
Schooling 0.0492 0.0294 0.0510 0.0554
(1.80) (1.05) (1.85) (1.98)
Age - .00392 .0332 - .00830 - .0232
(0.06) (0.52) (0.11) (0.29)
Age squared 0.104 - 0.441 0.168 0.393
(X 10-3) (0.10) (0.48) (0.16) (0.34)
Corn price - 0.0638 - 0.0279 - 0.0680 - 0.0719
(0.66) (0.30) (0.69) (0.73)
A (X 10-4) -0.101 -0.415
(0.24) (0.58)
Test statistic, task 1.23 1.18 1.14
variables + sugar
harvesting F(4,170)
Number of
observations 191 191 191 191

'All specifications include municipio dummy v

b Endogenous variable: Instruments include
and land interacted with round variables.
cAbsolute values of asymptotic t-ratios in parentheses.

those who were penalized least under a time-wage
regime would work for both piece-rate and time
wages.
To assess if sample selection importantly af-
fects the estimates presented in columns one and
two, we estimated two selectivity models. First,
we estimated the standard two-stage probit selec-
tion model (Heckman (1979)) in which we esti-
mated in the first stage probit equations for each
of the four survey rounds determining the proba-
bility that a worker earned both piece-rate and
time wages in that round. In principle, it is desir-
able to estimate a model that incorporates the
complete choice set of workers, of which working
under both payment regimes is one of four alter-
natives, the others being working for piece-rate
wages only, for time wages only, and not partici-
pating in the wage labor market. From such a
model, the probability of being in the category in
which payment forms are used can be computed
for each worker and this can be used to correct
for the selection of the sample. To estimate this
model and allow for error correlations across
categories, as in a multinomial probit model, is
extremely computationally burdensome. Instead,
we estimate as a second model, the multinomial-
logit selectivity model of Lee (1983), which
provides estimates characterizing the complete
choice-set, although it assumes independent er-
rors, and use those estimates to correct the sec-
ond-stage equation for the selectivity, if any, of
being in any one of the alternative sample cate-
gories.
The last two columns of table 3 report the
estimates of the differenced wage equations cor-
rected for the selectivity of the sample using the
probit and multinomial selectivity models, respec-
tively. The first-stage probit and the multinomial
logit estimates are presented in appendix tables
Al and A2. Both selectivity models yield similar
results. The signs of the coefficients of the A-terms
in each column, which indicate the correlation
between the residuals of the selection equation
and the wage difference equation, are, as ex-
pected, negative, suggesting that individuals more
likely to work under both payment regimes also

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 224 THE REVIEW OF ECONOMICS AND STATISTICS

TABLE 4.-FIXED-EFFECTS ESTIMATES OF LINEAR APPROXIMATION

To EULER EQUATION

Piece-rate work 0.225 0.225

(2.24)a (2.24)
On-farm work 0.158 0.161
(1.61) (0.98)
On-farm work x - 0.00386
fraction sharecropped (0.02)
Time-wage work 0.0456 0.0457
(0.58) (0.58)
Non-agric. work 0.00515 0.00513
(0.07) (0.07)
Log BMI -0.151 -0.151
(0.40) (0.40)
Illness -0.190 -0.190
(1.97) (1.96)
Log wage -
0.0276 - 0.0276
(0.64) (0.63)
Log corn price - 0.423 - 0.423
(5.31) (5.30)
Hypotheses
Piece-rate and on-farm coeffs. F(1,588) 0.27 F(1,587) 0.13
equal p-value 0.606 p-value 0.723
Piece-rate and non-agric. coeffs. F(1,588) 4.82 F(1,587) 4.82
equal p-value 0.029 p-value 0.029
Piece-rate and time-wage coeffs. F(1,588) 4.23 F(1,587) 4.22
equal p-value 0.040 p-value 0.040
Hausman testb F(7,581) 0.32 F(8,579) 0.28
p-value 0.945 p-value 0.973
All coefficients zero F(8,588) 5.68 F(9,587) 5.04
p-value 0.000 p-value 0.000
a Absolute values of t-ratios in parentheses.
bJoint test for endogeneity of all variables other than corn price. Instr
dummy variables interacted with land, age, sex, education and height.

experience a smaller premium for piece-rate tertemporal allocation of the log of calories for
wages relative to time-wages. And, the estimated individuals working in the wage labor market to
differential effect of calorie consumption on their work activities classified by payment regime,
piece-rate wages is greater when selectivity is their (log) BMI, illness, their (log) wage rate in
taken into account than when it is not. However, piece-rate work and the log of the price of corn,
the A coefficient estimated under either model is the dominant consumption good.'7 Consistent
not statistically significant, suggesting, conditional with the unobservability of calorie allocations to
on the selectivity models approximating the true the employer and with the existence of moral
model relatively well, that sample selectivity is hazard with respect to calories, the estimates
not important, given the specification of the wage indicate that piece-rate work evokes a signifi-
differential equation. cantly greater calorie allocation compared to
time-wage and non-agricultural work but no more
so than on-farm work.18
C. Payment Method and the Allocation
of Calories
17 We estimated the Euler equation on a sample of wage
If, as is evident in table 3, calorie consumption workers because it is necessary to include the period-specific
is not well-observed by employers, then we should value of time as a regressor, and this is not available for
individuals who are employed exclusively in own-farm activi-
expect that a worker's calorie consumption, like
ties. Because the Euler equation is estimated using fixed-
worker effort or energy expenditure, is withheld effects, sample selectivity should not be a problem as long as
when working for time-wages compared to piece the determinants of the probability of wage employment are
not different across periods.
rates or self-employment. Table 4 reports esti-
18 The Hausman-Wu test does not reject the orthogonality
mates of equation (17), which relates the in- of the regressors to the error term.

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 MORAL HAZARD IN THE LABOR MARKET 225

The estimates in column one indicate that
workers devoting all of their work time to piece-
rate activities are allocated 23% more calories
per day on average over the reference period
compared to a situation in which they devoted all
of their time to the non-labor-market activity,
workers devoting all of their time to on-farm
work are allocated 16% more calories while
workers employed exclusively under a time-wage
payment scheme receive only an insignificant 5%
greater allocation compared to being engaged in
the non-labor-force activity. In the second col-
umn we again differentiate cultivation by whether
it is performed under a share tenancy contract.
The addition of the share tenancy variable in-
creases the own-cultivation calorie effect so that
it is even closer in magnitude to that for piece-
rates (the difference is not statistically significant),
rates but not when workers work for time wages
and suggests, as expected, that share tenancy and that the same worker consumes 23% (16%)
reduces the calorie allocation, although the effect more calories per day when employed under a
is not statistically significant. These results, con- piece-rate payment scheme (on-farm employ-
sistent with the a priori ranking of worker incen-
tives associated with the payment regimes with
respect to calorie intake, thus conform to the
findings from the production function estimates
with regard to effort, as measured by BMI deple-
tion.19
V. Conclusion
In this paper we have established a method for
testing for the existence of moral hazard in labor
markets using information on worker health,
calorie consumption and type of payment regime.
19 We performed two other tests of the Euler-equation productivity and negatively responds to the price
specification. First, we tested whether calorie allocation rules
differed between men and women. The test statistic based on
the Chow test, in which the sample was split intar subsamples
containing men and women exclusively, was not statistically
significant (F(9,576) = 1.32). We also tested whether there
were significant differences in the costs of transferring re-
sources across periods among households. Individuals' in-
tertemporal strategies of storing calories in the form of food
stocks or in the body, through augmenting BMI, may depend
importantly on direct storage costs and rates of interest. To
assess the importance of heterogeneity in these costs, which
may vary by season and by wealth, we added round dummy
variables and interaction terms involving land size (to proxy
household wealth) and the round variables to the specifica-
tion. However, the set of coefficients associated with these
terms was also not statistically significant (F(6,582) = 0.60).
The estimates, based on longitudinal data from
the Philippines, indicate that contractual terms
significantly affect worker performance, with
worker effort, as reflected by both calorie expen-
diture and intake, inversely related to the degree
to which the worker has a claim on his or her
contribution to output. In particular, workers evi-
dently supply more effort under a piece-rate pay-
ment scheme or in self-cultivation on own land
compared to time-wage employment as reflected
in the fact that they deplete their body mass by
10% more, net of calorie consumption, when
working under a piece-rate scheme compared to
working as time-wage workers and 13% more
than share tenants or those outside of the labor
force. The evidence also indicates that calorie
intake is rewarded when workers work for piece-
ment) than when employed for time wages, also
consistent with the energy expenditure implica-
tions of moral hazard.
These results not only provide some empirical
foundation for the vast theoretical literature that
focusses on the central problem of effort elicita-
tion, but suggests that existing empirical evidence
on moral hazard, based on directly observed in-
put use, such as labor time, fertilizer, etc., under-
states the extent of moral hazard. The findings
also provide evidence that enterprises that rely
on wage labor, to the extent that such labor
cannot be paid on a piece-rate basis,20 or that
engage in operations on a share contract basis
will be inefficient relative to operations that rely
on family labor utilized on own resources. Finally,
the finding that calorie consumption augments
of the staple food crop implies that the seasonal
pattern of food price variation in part augments
productivity. This is because, typically, food prices
are lowest in the peak (harvest) work periods.
Thus, stabilization schemes may reduce total out-
put in such contexts, to the extent that workers
work under payment schemes that reward effort.
20 For a discussion of the conditions that determine the
feasibility of piece-rate work in the context of agriculture, see
Roumasset and Uy (1980) and Foster and Rosenzweig (1992). -

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 226 THE REVIEW OF ECONOMICS AND STATISTICS

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TABLE Al.-MULTINOMIAL LOGIT ESTIMATES: DETERMINANTS OF THE LOG-ODDS

OF RECEIVING ONLY A PIECE-RATE WAGE, ONLY A TIME WAGE
OR BOTH TYPES OF PAYMENTS IN A ROUND RELATIVE TO NEITHER

Variablea Piece-Rate Only Time Wage Only Both Wages

Schooling -0.219 -0.135 -0.167

(8.87)b (5.72) (9.02)
Age 0.421 0.306 0.200
(7.23) (5.74) (5.82)
Age squared - 0.00661 - 0.00454 - 0.00294
(7.47) (5.73) (5.92)
Height -
0.0194 - 0.0107 - 0.0248
(1.80) (1.01) (2.96)
Land owned - 0.410 - 0.289 0.241
(8.48) (8.25) (10.43)
Corn Price - 0.490 0.115 -0.279
(2.16) (0.51) (1.62)
Male 2.26 1.27 2.34
(12.0) (7.39) (15.8)
N 4896
x2(57) 1785.9
a Specification also includes three
bAbsolute value of asymptotic t-r

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 MORAL HAZARD IN THE LABOR MARKET 227

TABLE A2.-PROBIT ESTIMATES, BY ROUND: DETERMINANTS OF RECEIVING BOTH

PIECE-RATE AND TIME WAGE RATES IN ROUND

Round

Variablea 1 2 3 4

Schooling - 0.106 - 0.0908 - 0.0614 - 0.0876

(3.75)b (3.70) (2.34) (3.68)
Age 0.189 0.122 0.117 0.310
(2.87) (2.57) (2.18) (4.85)
Age squared - 0.00303 -0.00210 -0.00177 - 0.00474
(3.01) (2.97) (2.24) (4.87)
Height -0.00955 -0.0199 -0.00912 0.00650
(0.80) (1.84) (0.76) (0.63)
Land owned -0.142 -0.174 -0.150 -0.167
(3.27) (4.58) (3.16) (4.15)
Cornprice 0.189 0.196 -0.267 -0.590
(0.41) (0.54) (0.81) (3.50)
Male 0.871 0.147 0.636 0.561
(4.36) (7.40) (3.27) (3.29)
N 1224 1224 1152 1224
X2(16) 149.0 246.5 91.3 206.4

a Specification also includes nine munic

bAbsolute value of asymptotic t-ratio in parentheses.

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