Agriculture Reference
In-Depth Information
the asset will be useful. Longer-term contracts can avoid timeliness costs, but longer terms
tie up capital longer and increase idle time compared to a short-term contract.
Our focus on capital constraints, moral hazard, specialization gains, and timeliness
implies that we necessarily ignore other factors—life cycles, management, risk, taxes—
mentioned in the literature on ownership. Our reasons for ignoring these factors are practical.
First, since farming is dominated by family farms, issues of managerial shirking and
collective decision making are minor. Second, as we showed in chapter 6, there is little
evidence that effort to avoid risk plays any role in the organizational design of farms, so
throughout our analysis, the farmer and the asset owner are both assumed to be risk neutral.
Third, tax incentives, though important in many settings, are not considered here because
our data do not allow any observable variation in tax treatment. 9
We begin section 8.2 by developing a general framework for examining the choice of
asset control. We explicitly model the behavior of farmers and asset owners in a number of
specific contractual-ownership regimes and derive predictions about the conditions under
which ownership will be chosen over contracting. In section 8.3 we empirically confront a
number of our predictions with our British Columbia-Louisiana data, and with a detailed
case study of custom wheat harvesting on the Great Plains. In our econometric analysis
of farm data, we estimate the impacts of economic variables on choice to own or contract
for land, equipment, and buildings. Section 8.4 summarizes our findings and concludes the
Models of Asset Control
We confine our analysis to three dimensions of asset control: (1) whether the asset is
controlled by ownership or contract, (2) if the asset is controlled by contract whether the
contract is short- or long-term, and (3) whether the asset owner provides the labor that
accompanies the asset. Within this framework are five potential “governance structures,”
summarized in table 8.1. 10 Case 1, the pure family farm in which the farmer owns the
asset and supplies his own labor, is our starting point. Cases 4 and 5, short- and long-term
simple leases, are common forms of agricultural contracts and the focus of our econometric
analysis in section 8.3. Case 2, the short-term custom lease, is common in harvesting and
pesticide application. An important application of this case, custom wheat harvesting, is
examined in section 8.3. We ignore case 3, the long-term custom lease, because it is rare in
agriculture and we have no direct data to examine it. For each of the four cases we study,
we develop a model that incorporates the various incentives—capital costs, moral hazard,
specialization, and timeliness—described earlier. Rather than introduce all of these issues
at once, we elaborate on them in the cases for which they are relevant.
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