The Distributional Effects of Contractual Norms : The Case of Cropshare Agreements

According to principal-agent theory, a share contract strikes an optimal balance between risk-sharing and incentive provision when it is difficult to gauge the agent's contribution. This theory predicts that the size of the share should vary with economic fundamentals. In practice, however, the share divisions that are specified often cluster around "usual and customary" levels - even when there is substantial heterogeneity among principal - agent pairs. Using Illinois farm-level data observed between 1980 and 1994 that include soil productivity ratings, tenant net income, and crop yields, the author examines the economic consequences of adhering to established contractual norms. Almost all share agreements in the northern two-thirds of the state specify an equal division of crops between the landowner and tenant farmer, while the majority of share contracts in the southern third allot either three-fifths or two-thirds of all production to the tenant. The paper tests whether existing share arrangements distort the division of surplus between the principal (landowner) and the agent (tenant farmer), or if these potential distortions are somehow preempted by adjustments along other contractual margins. No previous study has attempted to empirically estimate the effect that uniformity in share contracts has on factor returns