Agriculture Reference
In-Depth Information
given the data available for our study. In the context of competitive farming where specific
assets are minimal, this issue is relatively unimportant. Competition among farmers for land,
and among landowners for renters, and competition between on- and off-farm opportunities
generally determine the returns to individual factors of production within narrow bounds.
This method assumes that “natural selection” has resulted in the most valuable contract or
organization being chosen, and is based on the idea first proposed by Alchian (1950).
11
Farmers and landowners, like everyone else, are keenly aware of their incomes and just
as aware of the effect of one type of contract over another on their bottom line. Given the
general stability of farming communities, it seems only reasonable to assume that contracts
and organization are fundamentally driven to maximize wealth.
12
Second, while we abandon some aspects of typical contracting models,
uncertainty
remains a crucial component
. Uncertainty allows individuals to exploit an exchange at the
expense of the other party because it masks their actual effort. This factor is important in
agriculture because weather, pests, and other natural phenomenon contribute so much to
the final output. In a land lease, for example, uncertainty from weather and other natural
forces means that the farmer has the opportunity to “exploit” the landowner in several
ways: undersupplying effort, overusing soil quality attributes, and underreporting the shared
crop, to name a few. The type of behavior we often focus on is moral hazard (or hidden
action) where the farmer, landowner, or other asset user does not bear all of the costs of his
actions. Moral hazard is just one type of transaction cost phenomenon, and like transaction
costs in general, uncertainty is necessary for it to exist. Still moral hazard is not the only
incentive effect we study; there are also measurement and enforcement costs arising from
uncertainty.
Third,
all assets are complex in the sense that they are comprised of many attributes
.
When assets are complex they create an opportunity for transaction costs to arise for every
attribute, which subsequently allows for divided ownership over the various attributes
because multidimensional assets are nontrivial to measure. A plot of land, for example,
is characterized by its size, terrain, nutrients, moisture, soil type, and so on. Different
ownership and contract types affect the various attributes in different ways, creating trade-
offs. These trade-offs allow us to explain the choice of organization based on different
transaction costs.
13
Fourth, though nature has a random component in uncertainty, she has a
systematic
component we call seasonality
. For contract choice we focus on the random aspect of nature.
Poor harvests, soil erosion, and nutrient and moisture depletion can be blamed on acts of
nature, even though land overuse may arise from improper tilling and pest control or other
practices. Although random acts by nature are a common element in modern contract theory,
our idea that nature also plays a systematic role is not found in the contracting literature.
14
Seasonality, instead, refers to crop cycles, the number and length of stages, and timeliness.
