Agriculture Reference
In-Depth Information
the farmer's share of output is “ratcheted up” over time as long as there is no commitment
to contract terms and the landowner can learn about the value of the random input. 16
In
s 2 =
the case where the farmer's incentive increases to the point where
100 percent, the
contract has switched from a share contract to a cash rent contract.
Thus far the model has been specified in terms of the landowner's ability to commit to a
contract or not. When there is commitment, there are constant incentives or shares across
periods. When there is no commitment, there is the ratchet effect or rising shares over time.
In order to operationalize this model we follow (Milgrom and Roberts 1992) and consider
commitment as equivalent to an ongoing relationship between a farmer and a landowner .
When a farmer and landowner have an ongoing relationship, they have an incentive to avoid
the ratchet effect, and we expect that they will commit to consistent contract terms over time.
On the other hand, if there is a new farmer, there is no commitment, and the landowner will
fully exploit his knowledge, based on past information. In this case, incentives should be
higher than with the past farmer. An additional implication of this reasoning is that if a new
landowner is involved in the second period contract, then constant incentives should be used
because he will be unable to measure accurately the past performance on the farm. Over
the two periods the ratchet effect will be absent because a change in landowners means that
the landowner is not able to acquire information about the farmer's past performance. This
leads to two predictions about the choice of a contract.
PREDICTION 7.1
New farmers contracting with established landowners are more likely to
cash rent land.
PREDICTION 7.2 New landowners contracting with either new or established farmers are
more likely to cropshare.
The Terms of Share Contracts
A ratchet effect might also lead to changes in the terms of a cropshare contract, without
causing a switch to cash rent contracts. Because the formal analysis in this context is similar
to the contract choice model, we only explicitly analyze case II (no commitment). To begin,
we simplify by replacing the side payment with an input cost share. Even though modern
share contracts do not often have side payments, they routinely share nonlabor input costs
as we showed in chapter 5. As a result the income for a farmer with a share contract becomes
Y = sQ qk C(e) Y
,
(7.5)
where
q (
0, 1
)
is the share of input costs borne by the farmer,
k
represents aggregate
nonlabor input costs (for example, fertilizer, seed), and
Q i = e i + k i + θ i
in each period to
include noneffort inputs. 17
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