Contract incentives and excessive nitrogen use in agriculture

Thsi study examines incentives for input use under tournament contracts. We analyze implications of contract design for nitrate-based environmental ex ternalities generated by agricultural producers. Outcomes are compared from contracts awarded by tournament to those fi-om fixed-payment contracts. Ou r findings show contract insecurity can distort input use. The model develo ped in this analysis is applied to a region of the U.S, where tournament-ba sed production is prevalent and groundwater contamination is a problem. We find contract insecurity increases nitrogen use by about 12%, resulting in a 17% increase in nitrate leaching. Implications for contract modification to reduce environmental externalities while maintaining contract incentives are discussed.