Agriculture Reference
In-Depth Information
uses an asset. For many farm labor tasks, the gains from specialization are limited because
stages of production tend to be short and require different skills from stage to stage. As
a result, farmers tend to be unspecialized “jacks of all trades,” as discussed in chapter 9.
Farmers, of course, may hire specialized labor to mitigate this cost but they will, in turn,
face costs of monitoring the labor and the asset.
We model labor specialization as a fall in its marginal cost (
), assuming that a specialized
farmer provides a standardized unit of labor effort at a lower cost than does a nonspecialized
farmer. For example, a specialized cutter might cut a field in five hours, while a (nonspe-
cialized) farmer might take ten. The explicit hourly rate of the cutter might be higher, but
the effective wage is lower such that the total costs of the cutter are lower. Specialization in
the use of the nonlabor assets results when the technology of the asset changes with higher
volumes of output. Larger machines often have larger fixed costs, but lower marginal costs
of operation such that lower average costs result for large volumes. A farmer who uses
a combine for 200 acres will use a different machine than a farmer who combines 2,000
acres.
We model asset specialization as a fall in its marginal cost (
w
), assuming that a more
specialized asset has a lower marginal cost than a nonspecialized one for a standardized
unit of
r
is not the same as increased quality. Equipment manufacturers
might make several different models with different degrees of specialization, yet all could
have the same
l
. Specialization in
l
be the marginal cost of the nonpriced attribute of
the asset. With complete specialization each input is provided at its lowest possible cost,
given by
k/l
ratio. Similarly, let
v
w
∗
,
r
∗
, and
v
∗
, respectively.
have opportunity costs that depend on the relationship between the
asset owner and the asset user. When a farmer supplies his own labor and asset (case 1), we
denote the opportunity cost of use as
The inputs
e
,
l
, and
k
w
o
,
r
o
, and
v
o
where
o
means “ownership.” When the
farmer has a simple contract for the asset, we denote the opportunity cost as
w
l
,
r
l
, and
v
l
,or
w
s
,
r
s
and
v
s
, where
mean “long-term” (case 5) and “short-term” (case 4) contracts,
respectively. Finally, when there is a custom contract (case 2) the opportunity cost is
l
and
s
w
c
,
r
c
,
v
c
, where
indicates “custom.”
As a benchmark, consider the first-best allocation of effort and asset use. The Coase
Theorem implies that, as long as transaction costs are zero, this allocation could be achieved
with any of the governance structures shown in figure 8.1.
12
Each input
and
c
(e
,
l
,
k)
has a cost of
w
∗
,
r
∗
, and
v
∗
respectively, so wealth is jointly maximized when the input levels of
e
∗
,
l
∗
,
k
∗
are employed, and the value (net of the costs of the inputs) of the governance structure
and
V
∗
(e
∗
,
l
∗
,
k
∗
)
is
. These optimal input levels occur where marginal products equal marginal
costs, inputs are fully specialized, and all inputs are delivered at the optimal time. In a
second-best world, however, where contracts are incomplete, this outcome is unattainable.
