Agriculture Reference
In-Depth Information
Though share contracts are not focal around 50 percent there is no denying their dis-
creteness and the fact that they take on simple fraction values. This puzzle, however, begins
to disappear when one considers the method and history in which a crop is produced and
shared on rented land. Among farmers and landowners, 50-50 contracts are called “halves,”
60-40 contracts are called “fifths,” 67-33 contracts are called “thirds,” and so on. It seems
that these simple fractions hark back to the days when crop division was split as follows: In
a two-thirds-one-third contract the farmer would keep for himself two truckloads of wheat
for every one delivered to the landowner. In fact, this type of load-by-load division is some-
times still found. Corn, for instance, is planted and harvested in well-defined rows and is
often governed by 50-50 share agreements when the land is rented. In these cases a farmer's
harvester may cut two rows at a time, and during harvest he cuts two rows, leaves the next
two, and then cuts the following two until the field has been covered. On this first pass, all
of the corn is kept by the farmer. Within days, the farmer cuts the remaining corn, which
goes to the landowner. During the interim, it is a trivial matter for the landowner to drive
by the field to see that he's getting a random 50 percent of the crop. This practice is im-
practical with most crops, but it demonstrates how incentives can result in standard sharing
practices.
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The use of discrete sharing rules that mimic simple fractions can be viewed as rules that
economize on measurement costs when measurement technology is imprecise. The simple
fact is that inputs are not exactly known, and increases in knowledge come from increased
measurement. Through experience landowners have rough ideas of what a yield should be;
rough ideas of how much effort, seed, fertilizer, and chemicals are being used; and rough
ideas of the crop, weather, and pest conditions. For a given crop and locale there is likely
to be one cropshare rule that provides a rough approximation to the ex ante second-best
equilibrium based on the general knowledge of the landowner and farmer. Finer divisions
are possible, but they require large costs of monitoring. Given the large and variable role
of nature, this monitoring must be done every year. Thus, although it is possible to have
cropshares with such terms as 52-48, it simply makes no sense to split this way or some
other marginal difference, when the landowner is incapable of knowing the exact relative
contributions without incurring enormous costs.
Discreteness has benefits and costs, and this explains why there are so few equilibrium
shares compared to cash rents. As developed in this and earlier chapters, a major cost of
the cropshare contract is underreporting of the output. Having finer divisions of output
is meaningless when output cannot also be economically measured more finely. This, of
course, is not the case with a cash rent contract where underreporting output does not
arise and the monitoring of cash payments is trivial. On the other hand, the benefits of
having payments fine-tuned are higher with cash rent contracts. Changes in economic
fundamentals, such as land productivity or input costs, will have first-order effects with cash
