9. Pasour (1990) has argued that the U.S. tax code may alter the incentives for the lease-own decision by allowing
farm capital owners to depreciate capital at a faster rate than owners of nonfarm capital. Ford and Musser (1994)
stress tax rates and capital rationing in their model of the lease-purchase decision. Hansmann (1991) shows that
federal tax law has long provided a net subsidy to owner-occupied housing. There is also a large literature in urban
economics that tends to focus on life cycles and taxes (Henderson and Ioannides 1983).
10. A sixth arrangement, in the lower left-hand cell in table 8.1, is left blank because it makes no sense to consider
the case in which the farmer does not use his labor (which includes family, hired labor, and slaves).
11. See Barzel (1997, chap. 3) for a discussion of the indirect pricing of exploited attributes.
12. For simplicity and ease of reading, the graphs are again drawn with straight lines, and we set w ∗ = r ∗ = v ∗ .
13. The lower marginal product curves given by h j [1 − X(θ) ], j = e , l , k are not relevant for this case and can be
14. This model is fashioned after Barzel and Suen (1994). Sengupta (1997) has a model with limited liability
as well as moral hazard in technique and effort that generates similar implications. In chapter 4 we empirically
considered some implications of capital constraints for the choice of share and cash land contracts.
15. Consider the case in which an asset owner supplies labor, effectively becoming a farmer. If the asset owner
decides to farm with the asset directly, his human capital input may be so low that
w o is extremely high, and this
lowers the value of the governance structure. For a number of reasons (for example, the asset owner lives far from
the farm, is too old to farm, is an aged widow, or lacks the knowledge or the physical ability to farm), this fall
in value may be drastic. We examine this case in our empirical work on land where we have information on the
16. The area is equivalent to the vertical distance because the two graphs plot different values.
17. See chapter 9 for more detail on the role of nature and timeliness in farming.
18. This is not the only econometric approach to this problem. For example, in the absence of contract data
Nickerson and Silverman (2002) estimate the fraction of output governed by various control regimes for a sample
19. We do this because WEALTH is partially determined by the value of the asset owned and may be correlated
with the error term. Estimates using these variables are virtually identical.
20. Asset ownership may also be separated to mitigate this incentive. For example, in Catalonian grapes, the farmer
owned the vines but leased the land (Carmona and Simpson 1999). As we noted in chapter 3, these share contracts
were automatically renewed as long as the farmer replaced the dead vines.
21. The estimates for NET WEALTH and LANDOWNER HUMAN CAPITAL are only significant at the 10
percent level in a one-tailed test.
22. Tractor prices vary with the horsepower, so rates are often discussed in terms of “horsepower hours.” See
Edwards and Meyer (1986) and Pflueger (1994) for some details on modern farm equipment leasing.
23. Barry, Hopkin, and Baker (1988) note the following in their topic on farm finance: “The greatest success for
operating leases is with general purpose items, which have user demands spread over various time periods” (298).
24. In terms of risk sharing, an increase in wealth might lower risk aversion under DARA and lead to more
ownership if asset ownership is riskier than leasing. We had little evidence in support of this effect in our chapter
6 analysis of farmland contracts.
25. This section is based primarily on the fascinating work of Isern (1981), a farm boy turned historian and a keen
observer of farm organization. The USDA study by Lagrone and Gavett (1975) is another important source.
26. See U.S. Department of Commerce, Bureau of the Census (1999), Table 3, “farm production expenses.” The
census does not collect data on specific custom services.
27. Prior to the introduction of the combine—a machine that combined harvesting and threshing—small grain
harvests were mostly done by large crews in two separate stages. Crews cut and bundled the grain, which would
then be stacked or stored until a second crew came along and threshed the grain (separated the grain from the
28. See chapter 9 for a discussion of how the extent of the farm has changed.