Agriculture Reference
In-Depth Information
Table 4.1
Summary of incentives for contract choice
Effort moral hazard
Land moral hazard
Output underreporting
Cropshare contract
Less
Yes
Yes
Cash rent contract
More
No
No
parameter changes on the net value of each contract can illuminate this trade-off and lead
to hypotheses about contract choice. We consider changes in output division costs,
µ
, and
the opportunity cost of land attributes,
r
.
V s . The net value of the cash rent contract,
V r , does not depend on output division costs. The net value of the cropshare contract,
V r and
Consider first how changes in
µ
affect
V s ,
∂V s /∂µ<
however, declines as these costs increase. By the Envelope Theorem,
0. For low
costs, the cropshare contract maximizes net value; for high costs, the cash rent contract
maximizes net value. This implies that
PREDICTION 4.1 As the costs of output division increase, it is less likely that the cropshare
contract will be chosen.
∂V s /∂r =− l s and
The comparative statics for
r
are similar. By the Envelope Theorem,
∂V r /∂r =− l r , where
l r >l s . Because neither
l s nor
l r depend on
r
, the second derivatives
V s and
V r with respect to
V s and
V r are linear functions of
of
. Thus,
an increase in the cost of land attributes will lower the value of either contract (holding
r
are zero. Therefore,
r
r
constant), but it will lower the value of the cash rent contract more because land inputs are
used more intensively in a cash rent contract than in a cropshare contract (
l r >l s ). This
implies that
PREDICTION 4.2a As the unpriced attribute of the land becomes more easily damaged, it
is more likely a cropshare contract will be chosen.
PREDICTION 4.2b
As land value increases, it is more likely a cropshare contract will be
chosen.
These predictions—regarding the choice of contract for different levels of crop division
costs
(r r )
—can be tested by using data on
contracts and the characteristics of crops, farmers, and landowners that allow us to measure
output division costs and soil exploitation.
Our model also has implications about the level of input use under both types of contracts.
However, the data available in our surveys of contracts from British Columbia, Louisiana,
Nebraska, and South Dakota only allow a test of the contract choice implications. These
µ
, and a farmer's incentive to exploit the soil

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