The Nature of the Farm

Using a model based on a trade‐off between moral hazard incentives and gains from specialization, this paper explains why farming has generally not converted from small, family‐based firms into large, factory‐style corporate firms. Nature is both seasonal and random, and the interplay of these qualities generates moral hazard, limits the gains from specialization, and causes timing problems between stages of production. By identifying conditions in which these forces vary, we derive testable predictions about the choice of organization and the extent of farm integration. To test these predictions we study the historical development of several agricultural industries and analyze data from a sample of over 1,000 farms in British Columbia and Louisiana. In general, seasonality and randomness so limit the benefits of specialization that family farms are optimal, but when farmers are successful in mitigating the effects of seasonality and random shocks to output, farm organizations gravitate toward factory processes and corporate ownership.