Incentives and contract design: a case study of farmland lease contracts in US agriculture

Keita Fukunaga

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: In this dissertation, I have studied farmland lease contracts in U.S. agriculture. Using the data from the 1999 Agricultural Economics and Land Ownership Survey, I investigated the empirical determinants of contract design from the perspective of the principal-agent framework, which emphasizes the role of incentives. In the empirical analyses, I found evidence that incentives indeed play an important role in contract design. In chapter 2, I investigated the role of risk, transaction costs, and endogenous matching between the landlord and tenant in contract choice. I found that both risk and transaction costs affect contract choice. Furthermore, I found evidence supporting endogenous matching between the landlord and tenant, and found that the matching is likely to affect contract choice. In chapter 3, I investigated whether contractual externalities exist in farmland lease design in modern U.S. agriculture. I argued that landlords non-cooperatively act and choose contract type due to negative contractual externalities. This leads to inefficient competition between landlords contracting with a given tenant and greater likelihood of cash rental contracts. I found some evidence that contractual externalities indeed exist and are likely to affect contract choice. In chapter 4, I investigated the link between contract choice and landlord participation decision from the perspective of the double-sided moral hazard hypothesis. I found some evidence to support the hypothesis, and furthermore, I found that other factors, including risk and transaction costs, are likely to affect contract choice and landlord participation decision jointly;This dissertation as a whole delivers an important conclusion: in farmland lease contracts in the United States, contract design is not just a matter of designing monetary compensation schemes or reducing transactions costs in accordance with the incentives in bilateral relationships, but involves various incentive devices (e.g., matching between landlords and tenants and landlord's participation in tenant's production decisions) in a way that the landlords can optimally coordinate incentives in multilateral relationships. Compared to the literature on farmland lease contracts that has principally dealt with the problem of designing monetary compensation scheme in bilateral relationships, I conclude that contract design in farmland tenancy related contracting is relatively complex.

Date: 2006-01-01
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