NATURE OF THE FARM: REVISITED

(ProQuest: ... denotes formulae omitted.)An extensive literature documents the effects of different types of ownership on farmer incentives and farm success (e.g., Dasgupta, Knight, and Love 1999, Otsuka and Hayami 1988, Allen and Lueck 1998). An important issue explored in those studies is farm efficiency when decision agents do not fully bear the costs of their decisions, a form of ownership commonly referred to as separated ownership and control (SOC). A seminal work on this problem was conducted by Allen and Lueck (1998) (hereafter referred to simply as Allen and Lueck), who considered the tradeoffs between agency costs and the benefits of SOC through partnerships, corporations and vertical integration. They posited that, if specialization provides benefits, farms organized as partnerships and corporations would be more efficient than farms organized with a single agent having full ownership and control as long as the SOC partners could monitor and enforce agent effort efficiently. However, most types of agricultural production are heavily influenced by random shocks imposed by nature, making it costly to differentiate production deficiencies associated with lack of farmer effort from deficiencies associated with nature. Allen and Lueck argued that agency relationships and their associated costs are a central reason for why farms "will remain small and family farms will likely be with us a long time to come" (1998, p. 380). They noted that SOC farms were primarily either family farms or the result of offsetting lower costs to capital and specialization due to reductions in the randomness of nature.We empirically test the effect of separating ownership and control and the interaction of separated control and operator effort on farm success using data for 2005 through 2010 from the U.S. Department of Agriculture's (USDA's) Agricultural Resource Management Survey (ARMS). Our approach follows the method used by Key and McBride (2008) to study the effects of adoption of production contracts on productivity of hog farms. However, we focus on all types of farms and compare farms that are exposed to greater uncertainty because of nature, such as grain farms, to farms that can reduce exogenous uncertainty using methods like climate-controlled confinement, such as livestock farms. We find that success can be significantly improved in grain farms when there is greater SOC and greater operator effort.1 However, we find no significant improvement for SOC livestock farms when there is greater SOC and operator effort. These results are consistent with Allen and Lueck's hypotheses. The greater exogenous uncertainty associated with grain production makes enforcing the operator's optimal effort more costly and can limit maximum farm performance in SOC farms. However, we find that SOC farms have superior farm performance despite differences in exogenous uncertainty and greater potential for suboptimal effort. Thus, greater specialization under SOC may allow for greater gains for some SOC farms that offset agency costs. Consequently, though we find evidence that the cost of agency may prevent the owner from fully enforcing optimal operator effort, we also find that the cost of agency does not completely prohibit agricultural operations from evolving to more SOC. Our results support the notion that agricultural operations will continue to evolve toward SOC despite agency costs associated with enforcing the desired level of effort in production when there is exogenous uncertainty.Our study is important because there is evidence that farmers are increasingly adopting organizational structures characterized by greater degrees of SOC and vertical integration (e.g., Hoppe et al. 2001) (as we define and discuss in more detail later). An important question is whether farmers who separate ownership and control will then be at a competitive disadvantage relative to farmers who rely on traditional ownership and control structures, such as family owned and operated farms that are not vertically integrated. …