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The Role of Risk and Transaction Costs in Contract Design: Evidence from Farmland Lease Contracts in U.S. Agriculture

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  • Keita Fukunaga
  • Wallace E. Huffman

Abstract

The objective of this article is to provide new empirical evidence on landlord-tenant choices of share versus cash-rent contracts in U.S. agriculture. The focus is on the contribution of explanatory variables that represent transaction costs, risk-sharing incentives, or both. An empirical model of contract choice is tested against the 1999 Agricultural Economics and Land Ownership Survey (AELOS) and finds mixed evidence for low transaction cost and risk-sharing-incentive motives for landlord-tenant choices of a share versus cash-rent contract. However, the behavior of landlords and tenants is consistent with them being risk averse. Although it is standard to control for the riskiness of the principal's task that is contracted, we find that other attributes of the landlord are an important part of a relatively complex story for U.S. land tenancy contacting. The latter results have generally been ignored in other published landlord-tenant contracting studies. Copyright 2009, Oxford University Press.

Suggested Citation

  • Keita Fukunaga & Wallace E. Huffman, 2009. "The Role of Risk and Transaction Costs in Contract Design: Evidence from Farmland Lease Contracts in U.S. Agriculture," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(1), pages 237-249.
  • Handle: RePEc:oup:ajagec:v:91:y:2009:i:1:p:237-249
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    File URL: http://hdl.handle.net/10.1111/j.1467-8276.2008.01164.x
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    Citations

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    Cited by:

    1. Baylis, Katherine R. & Chhatre, Ashwini & Prasanna, Satya & Songsermsawas, Tisom, 2012. "Friends or Traders? Do social networks affect the use of market mechanisms by farmers in India," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124889, Agricultural and Applied Economics Association.
    2. Marie-Catherine Riekhof, 2016. "The Insurance Premium in the Interest Rates of Interlinked Loans in a Small-scale Fishery," CER-ETH Economics working paper series 16/264, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    3. Paulson Nicholas D & Katchova Ani L & Lence Sergio H, 2010. "An Empirical Analysis of the Determinants of Marketing Contract Structures for Corn and Soybeans," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 8(1), pages 1-25, May.
    4. Hotopp, Henning & Mußhoff, Oliver, 2012. "Can rent adjustment clauses reduce the income risk of farms?," International Journal of Agricultural Management, Institute of Agricultural Management;International Farm Management Association, vol. 1(4), July.
    5. Douglas W. Allen & Allison Borchers, 2016. "Conservation Practices and the Growth of US Cash Rent Leases," Journal of Agricultural Economics, Wiley Blackwell, vol. 67(2), pages 491-509, June.
    6. Bellemare, Marc F., 2010. "Insecure Land Rights and Share Tenancy in Madagascar," MPRA Paper 23640, University Library of Munich, Germany.
    7. Qiu, Feng & Goodwin, Barry K. & Gervais, Jean-Philippe, 2010. "An Empirical Investigation of the Linkages between Government Payments and Farmland Leasing Arrangements," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49242, Agricultural and Applied Economics Association.
    8. Hu, Wu-Yueh & Vukina, Tomislav & Zheng, Viaoyong, 2014. "The Role of Risk and Risk-Aversion in Adoption of Alternative Marketing Arrangements by the U.S. Farmers," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 168930, Agricultural and Applied Economics Association.
    9. Liu, Elaine M. & Huang, JiKun, 2013. "Risk preferences and pesticide use by cotton farmers in China," Journal of Development Economics, Elsevier, vol. 103(C), pages 202-215.
    10. Grashuis, Jasper & Cook, Michael, 2016. "Governance and Performance in the U.S. Agri-Food Industry: A Comparative Study of Firms and Cooperatives," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 235676, Agricultural and Applied Economics Association.

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