Agriculture Reference
In-Depth Information
they are, contracting parties must specify the details in written agreements if they expect
reliable enforcement.
Contract simplicity depends on the costs of enforcement. These costs vary from case to case
and determine the detail of contracts. For farmland leases in the four North American juris-
dictions we consider, contracts are usually short-term and lack all but the most rudimentary
details. We have argued that this near universal simplicity reflects the comparative advan-
tage of enforcing customary farming standards through the market and the common law,
given the general absence of specific investments and the strength of market enforcement
and common law default rules. This character of the farming economy—good information
about reputations, desired long-term relationships, immobility of farmers and landowners,
and few transaction-specific assets—lends itself to the pervasive use of what may seem to
be rather naive contracts. We also used data on modern contracts to estimate the determi-
nants of oral (versus written) contracts and annual (versus multiyear) contracts. Overall,
we find that the presence of specific assets increases the probability a contract will be oral
and annual, and that the lower the cost of market enforcement via reputation the greater the
probability that a contract will be oral and annual. Our statistical findings are stronger for
our estimates of oral contracts than for annual contracts. Finally, we find that the relative
complexity of contracts on the frontier is explained by the lack of both a developed common
law and a lack of farmer and landowner reputations. Market and common law enforcement
does not work well, however, if infractions are difficult to detect. Though it may be easy
to detect fundamental improper farming practices, detecting specific examples of improper
tilling or output under reporting may be extremely difficult. For this, landowners and farm-
ers choose specific structures of contracts to create proper incentives. We now turn to the
choice and specific design of contracts in the next two chapters.
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