Agriculture Reference
In-Depth Information
have low human capital—that is, when a landowner is either a widow, is not farming, or
has never farmed.
As we have argued in the previous chapters, asset moral hazard for land means exploita-
tion of soil, long-lived crops, and irrigation systems. Land leases are designed to mitigate
asset moral hazard, but in many cases ownership is a more economical response than de-
tailed contracts with large enforcement costs. Asset moral hazard costs are generally going
to be high when a crop has several different dimensions of moral hazard that are not easily
handled in a simple contract, and when a specific moral hazard cost is very large.
Multiple moral hazard costs often arise with crops that involve trees and pruning. For
example, timber farms, orchards, most nut farms, vineyards, and the like all require the
planting of trees that produce output over time. With these crops, pruning is critical for a
sustained high-quality harvest. For fruits, output is temporarily higher if no pruning occurs,
but eventually the inner part of the tree ceases to produce and the fruit-bearing surface area
begins to diminish. To curb this, the leasing agreements tend to be share contracts because
they encourage proper pruning.
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With many fruits, this leads to a second moral hazard
cost. A share contract provides an incentive to underreport the quality and quantity of fruit.
Unreported fruit can be sold in secondary markets and roadside stands. More important,
the farmer may accurately report the volume of fruit but underreport the quality. The low
quality sent to the landowner ends up in the canned goods market, while the high-quality
fruit kept by the farmer is sold in the more lucrative fresh fruit market. We use the dummy
variable TREES to identify these crops.
A second case of multiple asset moral hazard exists for hay crops. These crops have the
potential for crop underreporting and for suboptimal crop maintenance. Since hay crops
are easily stored, fed to cattle, and sold through various outlets, sharing the crop is seldom
feasible. By contracting with cash rent contracts this incentive is eliminated. Compared to
a grain crop, a hay crop is a capital asset that requires maintenance over several years. If
the crop is not controlled for weeds it loses value and eventually must be replaced. A cash
rent contract, of course, creates an incentive for the farmer to exploit the short-term value
of the crop by running down the value of the crop capital stock. Our dummy variable HAY
identifies those grass crops with multiple asset moral hazard.
Some land assets may not have multiple moral hazard costs, but the single moral hazard
cost may be severe. Land used for row crops, such as corn and soybeans, is particularly
susceptible to soil exploitation because these crops have large short-term benefits from
cultivation and pesticide applications. Irrigated land has more potential for asset exploitation
because of the irrigation equipment attached to the land that can be damaged by a leasing
farmer who does not face the full costs of using and maintaining the irrigation system.
Irrigated land will be more valuable than nonirrigated land, but still there are unpriced
attributes such as the maintained quality of the pipes, ditches, wells, and related equipment.
