The Value of Social Capital in Cropland Leasing Relationships

In the U.S. economy, informal bargaining between persons for services or assets of relatively high value is common (e.g. used cars, houses). However, there is one example encountered frequently in agriculture: the cropland lease. Many farmers rent at least a portion of their cropland and typically no formal markets exist for pricing rental rates. This reliance on informal bargaining for the primary capital asset in farming suggests lease rates and the relationship between landowner and tenant have significant economic implications. Leasing relationships may be as long as a generation, with some land passing to the next generation without interruption. Does the existence of such a long-lived and close relationship affect the rates at which the land is leased? If so, cropland leases offer a unique test of the theory of social capital which posits that outcomes are a result of the interaction between traditional market behavior and social customs or norms. By characterizing the social aspects of cropland leasing relationships and their corresponding rental rates, this study analyzes the market for cropland to determine if lease rates are consistent with the theory of social capital. Data from a 2015 survey of Kansas farmers asking for contract terms and landowner characteristics were used to estimate a hedonic regression model. Empirical results support the hypothesis of a negative impact on rental rates from longer-term leasing relationships