Agriculture Reference
In-Depth Information
effect in the determination of contract choice compared to other explanatory variables.
Overall, our estimates show that even in the limited cases in which there is support for
a ratchet effect in private agricultural share contracts, they tend not to be economically
significant.
Our findings do raise the question of why ratchet effects are so limited in these data.
Several possibilities exits. First, if farmer heterogeneity is important, then adverse selection
incentives in the absence of commitment could lead to other behavior that would not
generate the ratchet effects in predictions 7.1 to 7.4. This seems unlikely in the context of
farming where farmers and landowners are relatively homogeneous. Second, if information
about farmers and landowners is sufficiently cheap to produce, then the landowner may face
reputation costs, even across farmers, which would limit his ability to change contracts when
dealing with a new farmer. Third, chapters 4 and 5 showed that multiple task moral hazard
is important in determining contract choice. This explains the dominance of row crops in
our estimates. Row crops require large amounts of soil manipulation and share contracts
are used to limit over exploitation. It may be the case that soil manipulation is so important
that adjusting the shares for a ratchet effect leads to serious soil depletion. Unfortunately,
our data do not allow us to separate out these different explanations.
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The general absence of ratchet effects may be unique to agriculture, or it may be quite
common. Ratchet effects can only occur when contract commitment is costly. To the
extent that private contracts only arise when commitment is not costly, then ratchet effects
should not be expected. Perhaps the best example is still government agencies where
turnover is common, information poor, and reputations hard to establish, all of which make
commitment difficult. In private contracts a stronger incentive exists to curb any of the
ratchet incentives and to make commitment more feasible.
This chapter completes our analysis of contract choice. We have shown the strength of
the transaction cost approach and the weakness of the standard principal-agent models. In
the next two chapters, we analyze different questions that deal with the ownership of assets
and the control over stages of production. For the remainder of the topic we ignore the role
of risk sharing and continue to focus on transaction costs.
