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Landowner's Contract Choice Under Uncertainty
A landowner is considering two ways to have their land farmed for the upcoming season. The value of the harvest is uncertain and depends heavily on the weather.
- Option 1 (Employment): The landowner can hire a worker for a fixed wage of $5,000. The landowner would then keep the entire harvest, whatever its value turns out to be.
- Option 2 (Tenancy): The landowner can rent the land to a farmer for a fixed payment of $4,000. The farmer would then keep the entire harvest.
If the landowner's primary goal is to completely avoid the financial risk associated with a poor harvest, which option should they choose? Justify your reasoning.
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A landowner offers a farmer two possible take-it-or-leave-it arrangements to cultivate a plot of land.
- Arrangement 1 (Employment): The farmer is paid a fixed daily wage to work the land, and the landowner keeps the entire harvest.
- Arrangement 2 (Tenancy): The farmer pays the landowner a fixed monthly rent for the land and keeps the entire harvest for themselves.
Which statement best analyzes the primary difference in risk and incentives for the farmer between these two arrangements?
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