Agriculture Reference
In-Depth Information
not interact with any other incentive effects, so the value of this governance structure is the
expected value of using the input levels (
e s ,
l s and
k s ) in the presence of timeliness costs:
V s (e s ,
l s ,
k s ) =
[ d d
h(e s ,
l s ,
k s ) + θ e s w s l s r s k s v s ]
Custom Short-Term Contract (Case 2). The main alternative to the simple short-term
lease is a custom short-term contract. In this contract, the asset owner provides a specialized
operator for a period that may not exactly coincide with the crop production stage. Timeli-
ness costs, however, remain. With a specialized asset and operator marginal costs are as low
as possible, or
v c = v . Asset moral hazard is eliminated because the farmer
cannot exploit the asset with the operator present, so the first-best levels of the priced and
unpriced attributes are chosen (
r c = r , and
k in figure 8.1, bottom panel). The choice of effort is
not, however, first-best because the farmer—not the operator—owns the crop causing ef-
fort moral hazard. Thus, even though the operator is specialized the farmer must engage in
some type of monitoring that makes
l ,
e c <e ). The
trade-off under a custom contract is clear: Gains from specialized assets and effort must
be weighed against effort moral hazard and timeliness costs. The value of the custom con-
w c >w
and effort less than first-best (
V c (e c ,
l c ,
k c )
, is calculated in the same way as in the simple short-term lease (equation
(8.5)), and is given by
V c (e c ,
l c ,
k c ) =
[ d d
h(e c ,
l ,
k ) + θ e c w l r k v ]
Comparative Statics of Asset Control Regimes
Table 8.2 summarizes the incentives inherent in the asset control regimes examined above.
As the analysis shows, no single option is globally superior and the first-best output is not
possible. Our presumption is that the existing arrangements are chosen to maximize the net
value of the farm. This leads to the following general propositions:
PREDICTION 8.1a The greater the asset moral hazard costs, the more likely ownership and
custom operation will be chosen.
PREDICTION 8.1b When contracting dominates ownership, simple leases are more likely
to be chosen as effort moral hazard costs increase, and custom leases are more likely to be
chosen as asset moral hazard costs increase.
PREDICTION 8.2a The greater the gains from labor and asset specialization the more likely
contracting will be chosen.
PREDICTION 8.2b When contracting dominates ownership, custom leases are more likely
to be chosen as the gains from effort specialization increase.
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