Agriculture Reference
In-Depth Information
4
Choosing between Cropshare and Cash Rent Contracts
4.1
Introduction
In chapter 3, we showed how rather simple contracts persist in modern agriculture because
of the absence of specific assets and because the common law and reputations substitute for
explicit contractual details. In this way, even simple (and short-term) contracts can avoid
gross breaches of contract that are relatively easy to observe. Other issues in contract struc-
ture, however, remain in need of explanation even when contract simplicity is accounted
for. Prominent among these issues is the age-old question of the choice between cash rent
contracts and cropshare contracts, which we examine in this chapter.
1
Over the years economists have devoted an enormous effort examining the rationale for
sharecropping. While considerable theoretical efforts have been made, it has only been
in the last decade that numerous empirical studies have been undertaken, especially for
modern Western agriculture.
2
Theoretical models often consider contracts that bear little
resemblance to those found in the United States and Canada today and thus generally do not
yield predictions relevant for the available data. The model of landowner-farmer contracting
that we develop is consistent with modern farm contracts, and we test its implications against
our data on individual contracts. This model serves as the basic framework for most of the
subsequent chapters.
4.2
A Model of Contract Choice
Cheung (1969) demonstrated that when transaction costs are zero, contract choice will not
influence the outcome of the contract; cash rent and cropshare contracts are equally efficient
methods of coordinating landowners and farmers. This application of the Coase Theorem
raises the obvious question: Why then, would farmers and landowners choose one type of
contract over another? As we noted in chapter 1, the economist's response to this ques-
tion was the development of transaction cost and risk-sharing theories of sharecropping.
Historically most models within the theoretical literature on cropshare contracts contain el-
ements of risk sharing, but in recent years theoretical work has shifted away somewhat from
risk-sharing into double moral hazard, multitasking, and strategy.
3
Recent work includes,
for example, Dubois (2002) on intertemporal incentives, Laffont and Matoussi (1995) and
Sengupta (1997) on moral hazard and financial constraints, Ray (1999) on strategic dele-
gation, and Arru nada, Garicano, and Vazquez (2001) on automobile franchising. This new
theoretical literature mimics the recent change in emphasis in modern contract theory (for
example, Gibbons 1998; Holmstr om and Roberts 1998), but like the old theory it is again
rapidly outpacing empirical work (Chiappori and Salanie 2000). There also has been work
in economic history on the choice of contracts which also has a transaction cost foundation.
4
