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Competition and Custom in Economic Contracts: A Case Study of Illinois Agriculture

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  • H. Peyton Young
  • Mary A. Burke

Abstract

Survey data suggest that cropsharing contracts exhibit a much higher degree of uniformity than is warranted by economic fundamentals. We propose a dynamic model of contract choice to explain this phenomenon. Landowners and tenants recontract periodically, taking into account expected returns as well as conformity with local practice. The resulting stochastic dynamical system is studied using techniques from statistical mechanics. The most likely states consist of patches where contractual terms are nearly uniform, separated by boundaries where the terms shift abruptly. These and other predictions of the model are borne out by survey data on agricultural contracts in Illinois.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.91.3.559
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 91 (2001)
Issue (Month): 3 (June)
Pages: 559-573

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Handle: RePEc:aea:aecrev:v:91:y:2001:i:3:p:559-573

Note: DOI: 10.1257/aer.91.3.559
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  1. William A. Brock & Steven N. Durlauf, 1995. "Discrete Choice with Social Interactions I: Theory," Working Papers 95-10-084, Santa Fe Institute.
  2. Akerlof, George A, 1980. "A Theory of Social Custom, of Which Unemployment May be One Consequence," The Quarterly Journal of Economics, MIT Press, vol. 94(4), pages 749-75, June.
  3. McKelvey Richard D. & Palfrey Thomas R., 1995. "Quantal Response Equilibria for Normal Form Games," Games and Economic Behavior, Elsevier, vol. 10(1), pages 6-38, July.
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  6. Lawrence Blume, 1993. "The Statistical Mechanics of Best-Response Strategy Revision," Game Theory and Information 9307001, EconWPA, revised 26 Jan 1994.
  7. Roth, Alvin E. & Vesna Prasnikar & Masahiro Okuno-Fujiwara & Shmuel Zamir, 1991. "Bargaining and Market Behavior in Jerusalem, Ljubljana, Pittsburgh, and Tokyo: An Experimental Study," American Economic Review, American Economic Association, vol. 81(5), pages 1068-95, December.
  8. James, William E. & Roumasset, James A., 1979. "Explaining Variations In Share Contracts: Land Quality, Population Pressure And Technological Change," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 23(02), August.
  9. Douglas W. Allen & Dean Lueck, 1993. "Transaction Costs and the Design of Cropshare Contracts," RAND Journal of Economics, The RAND Corporation, vol. 24(1), pages 78-100, Spring.
  10. Braverman, Avishay & Stiglitz, Joseph E, 1982. "Sharecropping and the Interlinking of Agrarian Markets," American Economic Review, American Economic Association, vol. 72(4), pages 695-715, September.
  11. Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, vol. 61(1), pages 57-84, January.
  12. Bell, Clive & Zusman, Pinhas, 1976. "A Bargaining Theoretic Approach to Cropsharing Contracts," American Economic Review, American Economic Association, vol. 66(4), pages 578-88, September.
  13. Binmore, Ken, et al, 1993. "Focal Points and Bargaining," International Journal of Game Theory, Springer, vol. 22(4), pages 381-409.
  14. Guth, Werner & Schmittberger, Rolf & Schwarze, Bernd, 1982. "An experimental analysis of ultimatum bargaining," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 367-388, December.
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