Agriculture Reference
In-Depth Information
commodities. We take pains to explore these constraints placed by nature and other farming
details in order to understand the transaction costs that arise under different forms of orga-
nization. We then use this to derive testable propositions about contract and organization
choice.
Second, we wish to contrast our transaction cost approach with theories based on,
or including, risk-sharing motives. Virtually all economists who study the economics of
organization recognize that incentives are important. The oldest, and most common, model
of share tenancy is one in which there is a trade-off between the incentives of the farmer and
his aversion to bear risk. Throughout the topic we will refer to this model as the “principal-
agent” model. In this model the contracts that provide the best incentives also generate the
most risk. Risk is, in effect, the cost of incentives. Our model is also based on incentives,
but incentives spread over many decisions made by the farmer, the landowner, or equipment
owner depending on the problem at hand. As it turns out, many predictions from these two
models are at odds with each other. We devote considerable space to empirically contrasting
the two.
Third, we want to study organization (the ownership and the contracting) of modern
agriculture in North America. That is, our topic is a detailed study of the organization of
a single industry—in both a historical and a contemporary context. Until quite recently,
the economic analysis of farm contracts and organization has focused on historic and
developing country cases.
3
As we mentioned in the preface, this has often led many to
conclude that cropsharing does not exist in modern farming communities. Among modern
agricultural economists who study North American farming, the focus has not been on
contracts but on neoclassical analysis of costs, production, and commodity markets. A
study of North American farming, where technology is advanced and where capital markets
are well developed, provides an opportunity to test theories often applied to only Third
World settings, and to explain a series of farming puzzles that have generally been ignored.
Although our topic relates to the literature that spans the fields of development, economic
history, and agricultural economics, our topic is not a literature survey. We make frequent
references to such literature in order to provide context for our models and results; however,
many excellent surveys already exist (for example, Otsuka and Hayami 1992), and we feel
it unnecessary to repeat them.
Finally, our objective is to explain a variety of economic organizational puzzles in
farming. Consider the following. Grain farmers use a large machine called a combine to
harvest grain, and depending on the crops grown and the size of farm, this machine may
only be used as little as two to three weeks per year. Combines are also one of the most
expensive pieces of equipment a farmer might own, with larger models costing $150,000-
$200,000. This is a classic case where economists would predict, based on the high cost
