PRODUCTION CONTRACTS AND FARM PRODUCTIVITY: EXAMINING THE LINK USING INSTRUMENTAL VARIABLES

Estimating how production contracts affect farm productivity is difficult because the decision to use a contract is endogenous to other decisions affecting productivity. This study uses the local availability of production contracts as an instrument for whether a farm uses a contract in order to estimate the impact of contract use on total factor productivity. Results indicate that use of a production contract is associated with a large increase in productivity for feeder-to-finish hog farms in the U.S. The instrumental variable method makes it credible to assert that the observed association is a causal relationship rather than simply a correlation.