Agriculture Reference
In-Depth Information
and moisture depletion can be blamed on acts of nature, even though these outcomes may
arise from improper tilling and pest control or other practices. For example, on leased land
farmers are not as careful with timing as they are on their own land. The timing of planting,
cultivation, pesticide application, and harvest is crucial to successful farming. Harvesting
too early or late can dramatically reduce crop yields, and applying pesticides at the wrong
time can damage soil as well as reduce future crop yields.
Broadly speaking, there are two issues in contract enforcement. The first issue has to do
with the
complexity
of the agreement. Contracts can specify, in great detail sometimes, the
obligations and rights of the contracting parties. In principle, contracts can specify input
levels, technologies, and various contingencies, but all of these dimensions will require
resources to insure compliance. Contract length is related closely to complexity. Longer
contracts align the incentives of both parties, especially for the maintenance and use of
durable assets, but longer contracts necessarily require additional stipulations to handle
conditions that change over time. In this chapter we examine the determinants of contract
complexity and contract length.
The second contract enforcement issue has to do with the
structure or type
of contract,
regardless of its complexity.
4
By contract structure we mean the method of payment (for
example, cash, share) for the use of the asset and the allocation of duties among the con-
tracting parties (for example, pest control, irrigation system maintenance). These structural
features define the incentives of the contracting parties in their day-to-day activities. The
determination of contract structures are examined in chapters 4 and 5.
3.3
Why Are Farmland Contracts So Simple?
To explain the simplicity of contracts, we focus on three economic factors: the presence
of specific assets, the viability of market enforcement of contracts, and the viability of
common law default terms that aid the enforcement of contracts.
5
Our general hypothesis
is that contracts will be simple, short-term agreements (and often oral) when specific assets
are lacking and when market and common law enforcement is inexpensive. Because these
conditions are often met in the case of farmland contracts, such contracts are often simple
and short as described by Knutson in this chapter's epigraph.
Specific Assets
Klein, Crawford, and Alchian (1978) and Williamson (1979) note that contracting parties
with transaction-specific assets put themselves in a position of being held up at renegotiation
when they use short-term contracts. The possibility of a holdup occurs because each party
could potentially extract, during renegotiation, the other's quasi-rents once the investments
