Agriculture Reference
In-Depth Information
could be further from the truth. It is the world of modern economic theory, one which I was
hoping to persuade economists to leave” (174).
An Empirical Understanding of Agricultural Organization
Transaction cost economics has a long-standing tradition of successful empirical analysis.
This has been our focus too, and in working with the data from the four regions we have
examined, we have found some robust results. Without simply repeating the empirical
details, we wish to summarize several dominant findings. We make this summary with
the understanding that our results are far from universal and many types of agriculture were
ignored.
First, when farmers and landowners contract for land, the contracts are simple in the sense
that they are mostly oral and short term. They tend to be policed through the market via
reputation, and the common law assists in providing default rules to simplify the structure
of contracts. Specific assets are often absent as well, providing further rationale for simple
contracts. In many rural farm settings, where individuals know one another well, expect
to have repeated dealings with each other, and can observe individual behaviors, then
reputations can sustain optimal behavior. This does not work for all farming activities, but
as we have noted, it is sufficient for blatantly observable cheating. In those less common
cases where specific assets are present, contracts become more formal, more detailed, and
longer lasting.
Second, contract structures are used to police behavior that is difficult to verify by a third
party. This behavior, which is costly to observe, is present when individuals are not full
residual claimants, and it is strongly influenced by enforcement and measurement costs.
We were often able to link these costs to specific characteristics of the crops and land. In
particular, crop type was an important factor in determining the type of contract that governs
its production because different crops present different opportunities for farmer moral
hazard. We also found some evidence for the presence of capital constraints leading to more
share contracting. Individual characteristics related to education or family relationships with
other contracting parties are not large or robust explanatory variables of contract choice. Nor
did we find support for the traditional agricultural ladder theory of farm organization. Wealth
levels were found to be important in questions of asset ownership. One of the strongest
categories of evidence we found for the transaction cost approach was our discovery of the
input sharing dichotomy that depended on the costs of measuring inputs.
Third, the classic trade-off between risk and incentives does not explain the choice of
contracts or organizations in agriculture, nor elsewhere as the recent agency literature has
shown. Our empirical results show two things: The basic risk predictions are refuted, and
the estimated risk parameters are relatively small. In particular, the classic prediction that
