Agriculture Reference
In-Depth Information
and low utilization rate, that farmers should rent combines. Yet most farmers still own their
combines and leave them idle for most of the year.
Our topic examines many such puzzling observations, and while we develop numerous
formal models within our basic transaction cost framework, the topic is also an empirical
analysis of testable predictions using contract and organization data. We use five separate
data sources, supplemented with census data, to provide the bulk of our information. These
data allow us to use standard econometric methods to test our predictions. In addition, we
rely on historical case studies, on such topics as Bonanza farms and custom combining, to
supplement our statistical analyses.
1.1
The Transaction Cost Approach to Contracting and Organization
Transaction Costs and Property Rights
At several places in this introduction we have mentioned the “transaction cost” approach,
and the time has come to explain what we mean by this phrase and how we believe it differs
from other economic approaches to organization. The transaction cost approach begins, of
course, with Coase's classic works on the firm (1937) and social cost (1960).
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In the latter
paper Coase pointed out that when transaction costs are zero, the allocation of resources
is independent of the distribution of property rights. Ironically, his most famous example
is an agricultural application: the cattleman dealing with his crop farming neighbor over
tresspassing cattle. When transaction costs are zero, the number of cattle tresspassing does
not depend on whether the cattleman possesses the right to trespass or not. The outcome is
determined by the joint wealth maximizing level of output on the two farms.
It remained for Cheung, in his pathbreaking topic, to recognize the general implications
of Coase's work to contracts. Cheung (1969) showed how, under the conditions of zero
transaction costs, a cropshare contract could achieve the same outcome in terms of crop
output as a cash rent contract could.
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The result is completely general. When transaction
costs are zero, it does not matter how the ownership of the inputs and outputs is distributed
by the terms of a contract. Farmers can control land through cash leases, share contracts,
or ownership; farms can be family run, sole proprietorships, or they can be large-scale
corporations; and farms can be integrated completely from breaking ground to baking the
bread, or disintegrated to the point of owning a wheat field for one day—it matters not one
iota.
At this point many economists, and others, are ready to abandon Coase's idea. It cannot be
stressed enough, however, that Coase's point was not that a model based on zero transaction
costs had any relevance for understanding economic organization. Just the opposite. He
