Introduction - The Nature of the Farm - page 12

in output caused by nature. 23 Obtaining such data is difficult because output data at the
contract level are “contaminated” by inputs from nature and the farmer. Finding such mea-
sures in studies of franchising and other areas has proved difficult, and as a result scholars
have either ignored them or relied on proxies that may seem reasonable, but are not often
clearly linked to the underlying theoretical model and may be highly endogenous to the
firm's behavior. To test explicitly for the negative relationship between risk and incentives,
it is crucial to have such data, which are notoriously difficult to obtain. Such data are not
necessary to test our model based on transaction costs and risk neutrality.

1.3 The Role of Government

Government intervention in agriculture in the United States and Canada is long-lived and
prominent. 24 Yet, for the most part, we ignore the role of government in affecting the
choice of contracts and organizations in agriculture. We have two primary reasons for doing
this. First, and most important, these interventions generally do not affect the kinds of
incentives we study and thus do not alter the relative costs and benefits of various contract
and organizational choices. Second, to the extent there is an impact, our statistical data
cannot readily isolate the effects of government. To illustrate these points, we first describe
the basic features of agricultural policies and then link them to our study.
In the United States, large-scale intervention in agricultural production began with the
New Deal legislation of the 1930s. This legislation established a set of policies providing
for price supports and production controls, crop insurance and disaster payments, export
subsidies, subsidized farm credit, land and water conservation, subsidized food distribution,
and expanded research and extension activities. 25 These programs have varied over time
but can be summarized as follows. Price supports (through target prices and nonrecourse
loans) and acreage restrictions have been the basic policy for cotton, rice, wheat, and
feed grains (barley, corn, grain sorghum, oats). Producers of these crops were entitled
to government “deficiency payments” that cover the difference between the target price
and the prevailing market price. 26 Soybean prices have been supported through loans and
government purchases. Sugar prices have been supported by import restrictions and some
price supports, and thus have impact on producers of sugarcane and sugar beets. Many other
products, including milk and certain fruits, vegetables, and specialty crops (for example,
almonds, oranges), are governed by marketing orders. These marketing orders typically
limit the production of the governed commodities by specifying quality and other details of
the product. 27 Milk marketing is different from other marketing orders in that price supports
are explicitly used to limit output. The 1996 Farm Bill introduced some important changes
in U.S. policy. 28 The target price system was replaced with a series of “transition payments”