Agriculture Reference
In-Depth Information
h
h l
h e
e
h l
B
s
h e
s
h l
C
D
E
F
w
r
A
H
G
r
s
e* = e r
s
r
e
e
l*
l
l
l
a) Farmer's Effort ( e
b) Land Attributes ( l
Figure 4.1
How share contracts minimize total input distortion.
there were no output division costs, the cropshare contract would always be superior to cash
rent because of the reduction in total input distortion. Cropshare contracts, however, do not
always dominate cash rent contracts, since they do create an incentive to underreport the
quality and quantity of crop. 19
Comparative Statics of Contract Choice
Farmers and landowners choose the contract that maximizes the joint expected return to the
tract of land. 20 Analytically, this requires comparing the expected net return to the land in
both contracts, where the net return is given by the appropriate indirect objective function.
For the cash rent contract,
V r (w
r ) = h(e r ,
l r ) we r rl r .
,
r
,
(4.3)
With the cropshare contract, there are additional costs of measuring and dividing the
harvested crop. These costs are given by
µ
so that the net value function is
V s (w
r ,
µ) = h(e s ,
l s ) we s rl s µ
,
r
,
.
(4.4)
V s .
The trade-off between the two contracts is straightforward, as shown in table 4.1. The
benefit of cash rent is the avoidance of the costs of dividing output
V r and
The joint maximization problem is to choose the larger of
. The benefit of
cropsharing is the reduction in the total distortion of input levels. Hence cropsharing should
be observed when output measurement costs are low and when soil attributes are easy to
exploit. Cash rent contracts should be observed under the opposite conditions. The effect of
µ
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