Agriculture Reference
In-Depth Information
Market Enforcement
It is well known that markets can self-enforce contracts. Punishment of cheaters, through lost
future trade, encourages cooperation between contracting parties (Klein and Leffler 1981;
Kreps 1990; Shapiro 1983; Williamson 1979). This market enforcement is most effective
where information about cheating is good and a frequent and long-lived relationship is
desired—conditions routinely met in farmland contracts. Farmers are often part of a small
community of people who have known each other most of their lives. Farmers tend to have
lived their entire lives at a single location and farm families have known each other for
generations. Information travels fast in such a community, and people are quickly aware of
anyone who cheats another and tend to avoid future dealings with that person. Thus, for both
a landowner and a farmer, a long-term interest exists in maintaining a good relationship. 9
The potential for market enforcement is greater when contracting parties have devel-
oped reputational capital that can be devalued when contracts are breached. Farmers and
landowners develop reputations for honesty, fairness, producing high yields, and con-
sistently demonstrating that they are good at what they do. In small, close-knit farming
communities, reputations are well known. Over time landowners indirectly monitor farm-
ers by observing the reported output, the general quality of the soil, and any unusual or
extreme behavior. 10 Farmer and landowner reputations act as a bond. In any growing sea-
son a farmer can reduce effort, exploit soil, or underreport the crop. Similarly, a landowner
can undermaintain fences, ditches, and irrigation systems. Accurate assessments of farmer
and landowner behavior will be made over time, and those farmers and landowners who
attempt to gain at each other's expense will find that others may refuse to deal with them in
the future. 11
The Common Law
A well-developed common law can also decrease the need for complex, long-term contracts
by making it unnecessary to incorporate numerous and specific details of performance
for the parties. For example, the prevalence of clauses or implied covenants of “good
husbandry” point to the law as a contract enforcer, since violation of such a clause provides
legal grounds to terminate the lease. Burkhart (1991) notes, “Every farm lease contains an
implied covenant to work the farm in a farmer-like manner. If the tenant does not use good
farming practices the covenant is breached and the landlord can recover damages. What
constitutes a 'farmer-like manner' can be shown by custom, practices of area farmers,
or county extension agents.” 12 The well-known 1963 Iowa case of McElwee v. DeVault
illustrates the law. 13 In this case the lease explicitly required the farmer to “farm said
premises in a good farmer like manner,” and the court upheld termination of the lease when
the farmer failed to follow standard farming practices regarding cultivation, which led to
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