Agriculture Reference
In-Depth Information
Ownership of Assets
Ownership of all inputs by a single party obviously eliminates the costs of contracting
for asset control by eliminating moral hazard and timing costs. Without these costs, asset
ownership would dominate contracting, and leasing would not occur. There are two primary
reasons why in fact, owning does not always dominate in farming. First, the gains from
specialization in effort and in using an asset may be large and not captured by ownership.
Second, capital constraints raise the costs of asset use.
Farmer Owns the Asset and Provides Labor (Case 1).
When a farmer provides his own
labor, he sacrifices specialization gains because he constantly changes tasks throughout the
year, so that
w
o
>w
∗
. This is, in fact, virtually the definition of a specialist—namely, that
he is the low-cost provider of a standardized unit. Similarly, a jack-of-all-trades farmer
will likely own an asset that does not fully exploit all technical specialization because the
asset's use on a given farm is also likely to be limited, so that
r
o
>r
∗
. A farmer who owns
an asset, however, bears all the costs of that asset—including the costs of the unpriced
attribute. Hence,
v
o
=
v
∗
, and there is no moral hazard with respect to the asset. Figure
8.1, top panel, shows the optimal input levels for this case. The optimal input level is
simply the intersection of the marginal product curves (
h
j
,
j
=
e
,
l
,
k
) and the marginal cost
i
o
,
).
13
(e
o
<e
∗
)
curves (
i
=
r
,
v
,
w
The figure shows that ownership leads to less effort,
,
(l
o
<l
∗
)
and less asset use,
, than is first-best. The value of this governance structure
k
o
=
k
∗
, which means that ownership leads to higher quality
assets. A farmer might have a smaller combine and use it less often, but it is optimally
maintained.
V(e
o
,
l
o
,
k
∗
)
is
. Note that
Ownership with Borrowing.
Additional costs of ownership arise because of capital
constraints. When borrowing to pay for assets, a farmer may not have enough wealth to
guarantee payment in all possible states of the world. With
Q
=
h(e
,
l
,
k)
+
θ
, assume the
farmer has purchased the asset
l
with a loan of amount
B
and promises to repay
(
1
+
ι)B
at
the end of the period—where
is the real rate of interest conditional on a given expectation
of bankruptcy. The farmer's income is
ι
if output is greater than the loan, but
given his limited wealth and limited liability from the protection of bankruptcy his income
is zero if
Q
−
(
1
+
ι)B
. The farmer's objective is to maximize his expected net income
across the possible states.
14
This expectation is not taken over all possible values of
Q
≤
(
1
+
ι)B
θ
,but
θ
(θ >(
+
ι)B
−
h(e
l
k))
only over those
that yield a level of income greater than zero
1
,
,
,
so with borrowing the owner's input choice problem is
∞
k
V
o
x(θ)dθ
−
w
o
e
−
r
o
l
−
v
∗
k
max
e
=
[
h(e
,
l
,
k)
+
θ
−
(
1
+
ι)B
]
.
(8.1)
,
l
,
(
1
+
ι)B
−
h(e
,
l
,
k)
