Agriculture Reference
In-Depth Information
rent contracts, since the farmer is the complete residual claimant of the crop, and changes
in the cash rent do not alter any marginal incentives. Cropshare contracts, however, are less
sensitive to such changes. Thus, it is natural that cash rent contracts are more finely tuned
than cropshare contracts. In fact, the Nebraska-South Dakota data show rather smooth terms
in cash rent contracts. The model term ($15 per share in 1986) accounts for just 7 percent of
all cash contracts. Given the lack of focalness in cash contracts and the near equal division
of contracts between cash and share, it would seem that a contract theory based on custom
is not supported by the data.
5.5
Summary
In this chapter we have focused on the differential incentives of various contract provisions
and derived implications about the fraction of the crop that is owned by the farmer as well
as the fraction of the input costs borne by both the farmer and the landowner. In particular,
we expect that with cropsharing the farmer either bears the entire cost of inputs or shares
the costs with the landowner in the same proportion as he shares the output. With striking
clarity, these Nebraska-South Dakota data show the input-sharing dichotomy predicted by
the model. In these two Great Plains states, farmers either pay all input costs or share them in
the same proportion as their share of the crop.
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These data also show that proportional input
sharing is more likely as the farmer's share of the output decreases. This is expected because
the distortions from output sharing are greater as the farmer's share of the harvest falls.
Input sharing is a method of reducing these distortions. We also found that inputs readily
purchased in the market were more likely to be shared than other inputs, and farmers who
had land in addition to the observed cropshare plot were less likely to share inputs than were
farmers who leased all their land in a single cropshare contract. Farmers and landowners
may routinely share the costs of fertilizer and seed, but they rarely jointly own and share the
use of buildings, combines, and tractors. In light of our model, this finding is not surprising.
Chapters 3, 4, and 5 contain transaction cost models of contract choice in modern
agriculture. We have shown that they are consistent with the observed characteristics of
farming in the four locations we examine. Our models have been based on a trade-off
between different transaction cost incentives. Before we apply this framework to questions
of ownership patterns and vertical integration, we turn our attention to an analysis of the
well-known trade-off between risk sharing and effort moral hazard, in the context of the
basic principal-agent model. It is common to find risk sharing at the heart of economic
models of contract choice. In the next two chapters we show that to the extent this idea is
testable, it has virtually no support from our data.
