Agriculture Reference
In-Depth Information
In this chapter we develop a model in the transaction cost tradition and ignore risk sharing
by assuming both contracting parties to be risk neutral.
5
In our model we assume that a given
tract of land is to be leased—owner cultivation is not an option—and the important choice
is between a cash rent and cropshare contract. In developing a transaction cost model of
contract choice, it is important to understand the incentives of each contract. In a cash rent
contract, the farmer pays a fixed annual amount per acre of land and owns the entire crop. As
a result, he supplies the optimal amount of his own inputs but overuses any inputs supplied
by the landowner.
6
Farmers can increase their wealth by not planting crops in a proper
rotation, overusing chemicals and fertilizers that damage the soil, and tilling in ways that
increase current crop output but reduce the future productivity of the soil. By manipulating
the timing of seeding, fertilizing, and harvest, the farmer can enhance his own return at the
expense of the landowner's.
7
For example, if a hail- or rainstorm is expected, a farmer may
harvest his own crop before a shared crop. In a cropshare contract the farmer shares the
harvested crop with the landowner. Because the farmer receives less than the full amount of
the crop, he uses fewer inputs and thus reduces the overall distortion from suboptimal input
choices.
8
Hence, the benefit of the share contract is that it curbs the farmer's incentive to
exploit the inputs supplied by the landowner, such as soil moisture and nutrients.
In principle, the landowner could also undersupply attributes of the land used by the
farmer, but for the types of farming we consider, both farmers and landowners indicate that
this is not likely. A landowner might be delinquent in road maintenance and fence upkeep,
but we find little or no evidence that these are the duties of landowners for the cases we
study. The large fraction of absentee landowners supports the view that landowners supply
just land and no other services. Thus, we assume only the farmer chooses the inputs in these
contracts, and our model features moral hazard only on the farmer's side.
9
Even though
share contracts reduce total input distortions, they entail costs that are not present for cash
rent contracts—the output has to be measured and divided.
10
For agriculture this requires
physical measurement and division of the harvested crop. As a result, the farmer has an
incentive to underreport the harvest to the landowner. Underreporting may take the form of
crop quality as well as quantity. For example, a farmer may keep the best hay for himself,
or he may keep the wheat with the fewest weeds, while not under-reporting quantity at all.
Alternatively, land leased for pasture is most often cash rented because the costs of detecting
quality and weight gain underreporting for live cattle is so high.
11
A cropshare contract also
implies that both the farmer and the landowner must sell their share of the crop and incur
the associated costs because cropshare contracts do not specify shares of the dollar value
of the crop, but shares of the crop. The trade-off between input distortion costs and output
division costs determines the contract choice, the joint wealth maximizing choice being the
contract that yields the highest value of output net of all costs.
We use a two-stage contract choice model. First, we determine the input choices made
by farmers in cash rent and cropshare contracts. Second, given the farmer's choices, we
