O-Ring Production on U.S. Hog Farms: Joint Choicesof Farm Size, Technology, and Compensation

We hypothesize that hog production can be characterized by complementarities between newtechnologies, worker skills and farms size. Such production processes are consistent withKremer’s (1993) O-ring production theory in which a single mistake in any one of severalcomplementary tasks in a firm’s production process can lead to catastrophic failure of theproduct’s value. In hog production, mistakes that introduce disease or pathogens into theproduction facility can cause a total loss of the herd. Consistent with predictions derived from theO-ring theory, we provide evidence that the most skilled workers concentrate in the largest andmost technologically advanced farms and are paid more than comparable workers on smallerfarms. These findings suggest that worker skills, new technologies and farm size are complementsin production. The complementarities create returns to scale to large hog confinements, consistentwith the dramatic increase in market share of very large farms over the past 20 years.[...]