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Contractual Externalities and Contract Design -Evidence from Farmland Lease Contracts in U.S. Agriculture

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  • Fukunaga, Keita
  • Hueth, Brent

Abstract

In modern U.S. agriculture, a tenant typically contracts with more than one landlord, although most of the past literature has focused exclusively on bilateral contracts with a single tenant and a single landlord. We argue that, in the presence of contractual externalities under which the landlords do not cooperatively act, multilateral contracting results in higher-powered contracts for the tenant, due to inefficient competition among the landlords, and that this incentive effect becomes a motivation for the use of cash rental contacts. Using the USDA's AELOS data set, we show that the number of landlords per tenant indeed increases the likelihood of cash rent and changes the qualitative properties of the contract choice equation. These outcomes provide empirical evidence supporting the incentive hypothesis.

Suggested Citation

  • Fukunaga, Keita & Hueth, Brent, 2006. "Contractual Externalities and Contract Design -Evidence from Farmland Lease Contracts in U.S. Agriculture," 2006 Annual meeting, July 23-26, Long Beach, CA 21368, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea06:21368
    DOI: 10.22004/ag.econ.21368
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    References listed on IDEAS

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