Introduction - The Nature of the Farm - page 1

1 Introduction
Despite their briefcase reputation, economists have shown a remarkable fascination with
farming and its various economic details. This might be expected of the agricultural econ-
omists in the profession—after all, that's their job—but it also has been true of general
economists. The economics literature is filled with discussions of farming, especially in the
context of share contracting, specialization, and the division of labor on farms. This litera-
ture includes the classical economists Adam Smith, who noted the moral hazard incentives
inherent in some farmland contracts, and John Stuart Mill, who identified the effect nature's
seasons had on the ability to specialize in farm production. It also includes modern scholars
such as recent Nobel Prize winner Joseph Stiglitz, who formally introduced the profession
to the principal-agent paradigm in the context of farming, and Yoram Barzel, who first noted
the multiple contracting problems that arise on both the farmer and landowner sides of the
market. Economists have been especially enamored of share contracts, and the inquiry into
their existence and efficiency has led, almost directly, to the modern theory of contracts. 1
Share contracts have been common worldwide for centuries, but perhaps more surprising,
these “cropshare” contracts—as they are called by American farmers—remain common in
modern developed agriculture as well. 2 Despite numerous theoretical inquiries into agri-
cultural share contracts, however, and despite their common occurrence, surprisingly little
is widely known about their details.
Although there is more to the “nature of the farm” than just share contracting for land, it is
fair to say that our economic understanding of farm organization beyond share contracting
is limited. For example, prior to the decision about the type of land lease, a landowner must
decide whether to rent the land or farm the land for himself. What determines this choice?
Furthermore, this decision of ownership versus contracting applies to the other major assets
on the farm as well as to the land, and the patterns of owning are vastly different for
equipment than for land. But what explains these different patterns of ownership? Although
farming is one of the last industries in which the majority of firms are owned by families,
over time the scope and depth of family ownership and production has eroded. What explains
this dominance and partial erosion? Although it is impossible to analyze all organizational
issues on the farm, we examine these questions in particular.
This topic has several objectives. First, we wish to demonstrate the power of the trans-
action cost approach in understanding many organizational features of agriculture. Though
we devote a great deal of attention to the issue of contract choice, we also examine the
ownership structure of the farm and the question of vertical control. Though our specific
models vary from chapter to chapter, the overriding theme is that contracts and other pat-
terns of ownership are chosen to mitigate transaction costs (to be defined momentarily). In
agriculture, transaction costs are heavily influenced by Mother Nature. Nature's uncertainty,
via weather and pests, allows for suboptimal asset use, and through seasonal forces nature
imposes constraints on production cycles that are not often found in the production of other