Agriculture Reference
In-Depth Information
The simplest family farm avoids moral hazard losses because the farmer is the complete
residual claimant. The simplest family farm also sacrifices gains from specialized labor
available in more complex agricultural firms. Small farm partnerships fall between family
farms and large, factory-style corporate farms. The small farm partnership captures some
gains from specialization while mitigating moral hazard. By identifying conditions in which
these forces vary, we derive testable predictions about the choice of organization and the
extent of farm integration. The results are quite striking. Production stages in farming tend
to be short and infrequent and often require few distinct tasks, thus limiting the benefits
of specialization and making wage labor especially costly to monitor. When farmers are
successful in mitigating the effects of seasonality and random shocks to output, farm
organizations gravitate toward factory processes, developing the large-scale corporate forms
found elsewhere in the economy. We test these predictions using historical industry case
studies as well our British Columbia-Louisiana data.
A Model of Farm Organization
Farm organization can vary from a single owner or simple partnership, where labor is paid
by residual claims, to a public corporation with many anonymous owners and specialized
wage labor. A pure family farm is the simplest case, in which a single farmer owns the output
and controls all farm assets, including all labor assets. 4 Factory-style corporate agriculture
is the most complicated case, where many people own the farm and labor is provided by
large groups of specialized fixed wage labor. Partnerships are intermediate forms, in which
two or three owners share output and capital, and each provides labor. 5
Agriculture is characterized by several distinct stages of production—planting, cultiva-
tion, harvesting, and processing for plant crops; or breeding, husbandry, and slaughter for
livestock—largely determined by nature. 6 In principle, there is no reason why a separate
farmer could not own and control each stage. It would be possible, for example, for one
farmer to prepare the soil, a second farmer to plant, a third farmer to apply pesticides, a
fourth to harvest the crop, and so on. Each of these separate “farms” could be connected
to the other farms at adjacent stages by market transactions for the output from their par-
ticular stage. In reality, however, most farmers control several stages of production, such
as soil preparation, planting, cultivation, and harvest. At the same time, differences often
exist in the number of firm-controlled stages across different farm products. In many cases,
a family farmer harvests and stores his own crop. In other cases, a family farmer may be a
member of a cooperative that owns the storage facility. In such a case, the farm is extended
from harvest into processing, but the ownership of the “farm” at the two stages is not the
same. 7
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