Agriculture Reference
In-Depth Information
potentially specific to an agricultural region, tends not to be specific to any single farmer
or landowner. For these reasons, specific assets play a minor role in the analysis in this
chapter. We do, however, consider timeliness costs, which might be considered a variant on
temporal specificity (Masten, Meehan, and Snyder 1991).
There are, of course, costs associated with contracting and costs associated with owner-
ship. As we have stressed throughout the topic, assets are collections of difficult to measure
attributes that naturally vary in characteristics and are alterable by people. This makes con-
tracts necessarily incomplete and allows renters opportunities to impose costs on the asset
owner. Compared to ownership, all short-term contracts create some form of moral hazard
because farmers face lower costs of using attributes that are unspecified and unpriced in a
contract. For example, land is rented by the acre but soil quality is not specified. Similarly,
many of the quality dimensions of buildings and equipment are not specified. As a result,
farmers mine the soil, overload buildings, and generally overutilize the unpriced attributes
of the contracted asset (as discussed in chapters 3 and 4).
In this chapter we introduce two costs of ownership. First, when choosing to own
rather than contract, the farmer often forgoes the gains from specialization. For example, a
farmer can seldom fully exploit the largest tractors, combines, trucks, and other pieces of
equipment. 5 Second, ownership has capital costs, not associated with contracting, that can
arise when the farmer lacks the wealth to guarantee the purchase of the asset.
In this chapter we also extend our earlier analysis and introduce two new costs of
contracting. The first is moral hazard resulting from incomplete control rights over assets. In
what we now call simple contracts the farmer retains primary control over the physical use of
the asset (for example, he operates the leased combine). 6 When the farmer maintains control,
he has an incentive to damage or undermaintain the asset because he does not fully own it.
Custom contracts , however, are contracts in which the asset owner—not the farmer—is the
operator and thus retains control over the asset. 7 When the asset owner maintains control,
the incentive to harm the asset disappears, but there is now an incentive for moral hazard
on the part of the asset owner through the supply of his effort. Thus, there is a trade-off
between two types of moral hazard depending on which party controls the asset during the
contract period.
The second cost of contracting stems from the imperfect alignment of the contract length
and the relevant stage of production. Contract length affects the costs of contracting because
of the importance of timeliness in the application of farmer effort. The timing of planting,
cultivating, pest application, and harvest are often crucial because it can dramatically reduce
farm output and crop quality. If the contract period is shorter than the relevant production
stage, the farmer thus incurs timeliness costs. 8 Because the optimal times for important
stages are not well known in advance, it is difficult to contract for the precise dates when
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