Agency Costs in Agricultural Contracts
While complete contract theory is useful for explaining the terms of agricultural contracts, such as the sharing percentages in tenancy contracts (Steven N. S. Cheung, 1969), agency costs are typically needed to explain their forms. For example, piece rates are preferred for labor tasks where quality is readily observable, e.g. sharpened sugar cane stalks ready for planting. Where effort quality is difficult to observe, e.g. the uniformity of broadcast seeds or fertilizer, wage rates tend to be used. Allen and Lueck (2004) have found that farm organization is strongly influenced by diversity in the form of moral hazard such that crop and household characteristics explain the nature of the farm, even the lack of risk aversion. Roumasset (1995) finds that warranted intensification (e.g. due to land quality) jointly determines optimal specialization on the farm, along with the agency costs of alternative agricultural firms. Where warranted specialization is low, peasant farmers relying on household labor predominate. In high value-per-hectare agriculture, however, there is extensive horizontal specialization by task and vertical specialization between owner, supervisory personnel and workers. These agency theories of farm organization and agricultural allow for multiple shirking possibilities, in contrast to the principal-agency version of sharecropping and agricultural contracts (Stiglitz, 1974, 1988, 1988) which trades-off labor shirking vs. risk-bearing.
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