Nature of the Farm: Revisited

We empirically test separation of ownership and control (SOC) and the interaction of SOC with farmer effort on farm success using data from the U.S. Department of Agriculture's Agricultural Resource Management Survey. We use a two-stage least-squares approach with instrumental variables that proxy for participation constraints in binding incentive contracts. We find that the interaction has a significantly positive effect on success for grain farms and an insignificant effect for livestock farms. The results are consistent with hypotheses by Allen and Lueck (1998), but our model predicts that farms with SOC are likely to be more successful than farms without SOC despite exogenous uncertainty and agency costs.