Moral hazard and the division of labor in agricultural land leases

Abstract

Many producers use leasing of agricultural land as a management strategy to conserve limited capital, expand their operation, or to reduce risk. The contractual form of land leases can vary depending on the type of crop, prevailing technology, market structure, and other characteristics of the social and economic environment (Eswaran and Kotwal, 1985). The USDA reported that 41% of U.S. farmland was operated under lease agreements in 1997 compared to 35% in 1950 (Hoppe and Wiebe, 2002). Analysis of agricultural land lease arrangements has been a focus of economists since the early writings of Adam Smith and John Stewart Mill (Dasgupta et al., 1999). However, substantive empirical analysis on agricultural lease contracts represents a much younger and smaller literature (Allen and Lueck, 1992; Dasgupta et al., 1999). The objective of this article is to model the incentive effects of the division of labor between landlord and tenant for production under limited-duration land lease contracts. The model provides an intuitive result: landlords will be responsible for provision of durable and landholding specific inputs, whereas tenants will tend to be responsible for inputs whose productivity is fleeting. Implications of the model as applied to specific production settings are then empirically tested using data from Oklahoma statewide farmland leasing surveys conducted in 1998 and 2000. There are many studies done on the reasons for the existence of various contractual forms (Alston and Higgs, 1982; Janssen et al., 2002; Otsuka and Hayami, 1988; Stiglitz, 1974). However, whatever the contract type, lease agreements and negotiations involve assignments of responsibilities to supply relevant inputs and tasks to the contracting parties of landlord and tenant. To our knowledge, little or no empirical work has focused on the division of labor and responsibility for input provision in agricultural land contracts.