Agriculture Reference
In-Depth Information
as a benchmark to compare the actual contracts and organizations, because the presence
of transaction costs makes this outcome unattainable. The second step is to examine the
various contracts or organizations and determine the optimal value functions under each
and to examine the comparative statics of these functions. Next, we assume in all cases
that the joint wealth maximizing contract or organization is chosen. Finally, we test derived
predictions using our data from North America.
1.2
The Role of Risk in Contract Economics
The transaction cost approach, with its trade-offs of one incentive against another, can
be contrasted with the classic “principal-agent” approach to share contracting where it
is assumed that contracts are designed to spread the risk of crop farming away from
the farmer and partially on to the less risk averse landowner.
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The fundamental idea
that farmland contracts are designed around a trade-off between risks and incentives is
commonplace among economists. Indeed, Stiglitz (1987) writes, “The sharecropping model
has served as the basic paradigm for a wider class of relationships known as principal-agent
relationships” (321), and Sappington (1991) notes, “The classic example of the principal-
agent relationship has a landlord overseeing the activities of a tenant farmer” (46). In their
important study Otsuka, Chuma, and Hayami (1992) claim that risk aversion “provides
the most consistent explanation for the existence of a share contract” (2012). Relying on
the standard risk-sharing framework, they further state: “As in typical agency models, the
most obvious factor to be accounted for in considering the optimum contract choice is the
presence of uncertainty coupled with the risk aversion of the contracting parties” (1987).
The dominance of this approach in modeling the behavior of farmers and landowners
is not limited to those studying developing countries or economic history (for example,
Otsuka, Chuma, and Hayami 1992; Townsend 1994). It is routine among agricultural
economists studying farm behavior—including acreage and crop choice studies as well as
contract studies—to assume that farmers are risk averse and stress the role of risk sharing
in determining behavior.
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Despite the prominence of the risk-sharing paradigm, the empirical evidence to support
it is scarce.
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In agriculture there has been little empirical work at the contract level and
nearly all of this has been in developing economies (Otsuka, Chuma, and Hayami 1992).
In one of the early studies to confront risk sharing and contract choice, Rao (1971) found
that crops with high yield and profit variability were less likely to be sharecropped, directly
refuting the anecdotal evidence originally provided by Cheung (1969). At the same time,
studies by Rao and others (for example, Higgs 1973) tend to use rather small samples of
highly aggregated data, making clear inferences difficult.
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In chapters 6 and 7 we examine
