Participation, Incentives and Social Norms in Partnership Arrangements Among Farms in Sweden

In this study, farmers´ participation in partnership arrangements involving labour and machinery collaboration is analyzed. Potential gains from partnership arrangements include lower capital costs and increased possibilities for farmers to specialize in different tasks. A potential cost is the incentive to shirk in effort or to overuse or misuse shared inputs (the moral hazard problem). Factors that mitigate the problem of moral hazard in team production have been suggested in the literature and include peer pressure and social norms (Barron and Gjerde, 1997; Kandel and Lazear, 1992) and dynamics (Radner, 1982). In this study, a theoretical framework for analyzing partnerships among farmers developed by Allen and Lueck (1998) is extended to consider presence of social norms. It is illustrated that social norms imply higher exerted effort levels among the partners. When inputs are shared among farmers, it is shown that the incentive to misuse or overuse capital is reduced in the presence of social norms. Predictions from the theoretical models are analyzed using survey data for Swedish farms. Results from the empirical analysis suggest that perceived moral hazard problems are non-existing or very small and that there is a high degree of mutual trust in existing partnerships.