Organizational Economics in Agriculture Policy Analysis

The ongoing industrialization of U.S. agriculture encompasses important changes in farm production practices, in the organization of farm input and output markets, and in the mix of activities carried out by farm operators. These shifts raise important issues for the role of government in the sector and for the design of research and data programs to support public-policy analysis. Basic frameworks of organizational economics—in particular, concepts from principal-agent models, organizational design, and transaction costs— have direct applications in addressing these issues.1 While organizational economics has been used in some areas of policy analysis, the concepts are underutilized in other areas. “Industrialization” encompasses four important organizational shifts, to more differentiated food products; to more explicitly coordinated production and marketing channels, such as contracts; to expanded use by farmers of leasing arrangements, alliances, and service purchases; and to increased farm sizes. These shifts are the most prominent organizational responses to an underlying collection of causal forces at play, including the mechanical, chemical, and biological innovations that drove twentieth century advances in agricultural productivity, as well as more recent information and biotechnology advances. The forces underlying agricultural industrialization affect the design and impact of, and support for, various public policies in agriculture. Policy has long encompassed commodity programs designed to support farm household incomes and manage supplies; market