The Terms of Agricultural Contracts: Theory and Evidence

Standard contract theory predicts that contractual terms between tenants and landlords should reflect the quantity and quality of factor inputs (labor and land), the degree of risk aversion of the parties, and various structural features of the labor market such as alternative wages, turnover rates, and search costs. We examine these theories in the light of data on the terms of contracts, as well as the resulting real returns to labor and land, in contemporary Illinois agriculture. Contrary to standard theory, contractual terms exhibit a very high degree of uniformity in spite of demonstrable variations in underlying fundamentals. In particular, contracts coalesce around certain regional norms that are insensitive to local variations in land quality. A particular implication is that labor on higher quality land captures a sizable portion of the land rent: about one-third of the incremental surplus from farming more productive soils goes to the tenant, even after adjusting for differences in labor quality, riskiness in returns, and security of tenure.