Using a model based on a trade-off between moral hazard incentives and gains from specialization, this paper explains why farming has generally not converted from small, family-based firms into large, factory-style corporate firms. Nature is both seasonal and random, and the interplay of these qualities generates moral hazard, limits the gains from specialization, and causes timing problems between stages of production. By identifying conditions in which these forces vary, we derive testable predictions about the choice of organization and the extent of farm integration. To test these predictions we study the historical development of several agricultural industries and analyze data from a sample of over 1,000 farms in British Columbia and Louisiana. In general, seasonality and randomness so limit the benefits of specialization that family farms are optimal, but when farmers are successful in mitigating the effects of seasonality and random shocks to output, farm organizations gravitate toward factory processes and corporate ownership.
We use a natural experiment in nineteenth-century Ohio to analyze the economic effects of two dominant land demarcation regimes, metes and bounds (MB) and the rectangular system (RS). MB is decentralized with plot shapes, alignment, and sizes defined individually; RS is a centralized grid of uniform square plots that does not vary with topography. We find large initial net benefits in land values from the RS and also that these effects persist into the twenty-first century. These findings reveal the importance of transaction costs and networks in affecting property rights, land values, markets, and economic growth.
This paper examines the extent to which landowners have preemptively destroyed habitat for the endangered red-cockaded woodpeckers (RCWs) in the forests of North Carolina in order to avoid potential land-use regulations prescribed under the Endangered Species Act (ESA). Under the ESA, it is illegal to kill an endangered species and it is also illegal to damage its habitat. By preventing the establishment of an old-growth pine stand, landowners can ensure that RCWs do not inhabit their land and avoid ESA regulations that limit or prohibit timber harvest activity. Data from 1984-90 on over 1,000 individual forest plots are used to test predictions about the probability of harvest and the age of timber when it is harvested. We find that increases in the proximity of a plot to RCWs increases the probability that the plot will be harvested and decreases the age at which the forest is harvested.
Structuring contracts to share risk in light of incentive problems is the central premise of contract theory, yet the risk-sharing implications have rarely been thoroughly tested using micro-level contract data. In this article we test the major implications of a principal-agent model of contracts using detailed data on more than 4000 individual contracts from modern North American agriculture. On a case-by-case basis, our evidence fails to support the standard principal-agent model with risk aversion as an explanation of contract choice in modern North American farming. At the same time, we find some support for models that assume risk-neutral contracting parties and stress multiple margins for moral hazard and enforcement costs.
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