The Role of Risk Preferences, Selection, and Uncertain Returns on Land Contracts
Jun Yeong Lee, Grant Durbahn, Peter F. Orazem, Wendong Zhang
February 2023 [23-WP 646]
Lee, J.Y., G. Durbahn, P.F. Orazem, and W. Zhang. 2023. "The Role of Risk Preferences, Selection, and Uncertain Returns on Land Contracts." Working paper 23-WP 646. Center for Agricultural and Rural Development, Iowa State University.
Using panel data on a statistically representative sample of Iowa farmland parcels from 1997 to 2017, we analyze the factors determining whether land is farmed by the owner or rented out under a cash rent or crop share contract. The landowner’s decision to rent or operate the land depends on the distribution of expected net returns to the land, and so estimates of the factors affecting rental terms will be biased if the sample only includes rental contracts and excludes the owner-operator. Land with higher mean and/or lower variance of expected net returns is most likely to be rented out. Participants in the rental market will include the most risk-averse landowners and the least risk-averse tenants, while the least risk-averse landowners operate their own land. Our empirical results suggest that the rising use of cash rent contracts and declining incidence of owner-operation and crop-share rental contracts is consistent with falling coefficient of variation in expected net returns per acre.