Agriculture Reference
In-Depth Information
Buildings: Ownership versus Contracting
The choice of building control regimes is also a choice between ownership and a simple
long-term contract. Buildings are often rented with land and tend to be rented for one year
on cash rent terms. Like land and equipment, many attributes of buildings remain unpriced.
Again, not all of the incentives identified in table 8.2 are relevant for buildings. Asset moral
hazard and capital constraints are the most important incentives. As with land, timeliness
costs are not a factor since the typical lease arrangement spans well beyond any seasonal
dates.
Like land and equipment, increases in capital constraints are predicted to increase the
probability of leasing for buildings. Again, we measure wealth using WEALTH (the com-
bined value of land, buildings, and equipment) and NET WEALTH (value of land and
equipment).
For buildings, asset moral hazard means exploitation of the structure because of overuse,
improper use, and suboptimal maintenance. We use several variables to measure differences
in asset moral hazard costs. First, we use BUILDING AGE because older buildings will be
less susceptible to damages by the farmer. Second, we use a dummy GENERAL BUILDING
to distinguish those buildings that have a very narrow use. Specialized buildings (for
example, storage bins) are seemingly easier to monitor given that the owner of the building
would be aware of the depreciation that should normally occur under the specific use. Moral
hazard costs with specialized buildings are lower because they tend to be used for single
purposes, and it is often very costly to use them for something else. For example, storage
bins are uninhabitable.
Unlike our estimates for land and equipment, for buildings we are able to include a
variable that measures specific assets. RENTED LAND is a dummy that indicates whether
or not the land on which a building sits is rented or owned. When land is owned (rented),
we predict that the building is also more (less) likely to be owned because the two assets
(land and building) are specific to each other.
Table 8.6 presents the logit coefficient estimates from two separate equations. Each of the
1,938 observations is a single farm building (for example, barn, garage, grainery, machine
shop), either leased or owned by the farmer. Like the land and equipment equations, the
dependent variable equals one if the buildings is rented and zero if owned. The independent
variables are organized into those measuring capital constraints, asset moral hazard, specific
assets, and other controls.
The coefficient estimates for WEALTH and NET WEALTH are both negative and statis-
tically significant. These estimates are consistent with our model that equipment leasing is
more likely to occur as capital constraints increase. Our model is also strongly supported by
the coefficient estimates for the asset moral hazard variables—BUILDING AGE and GEN-
ERAL BUILDING. They all have the predicted sign and all are statistically significant.
