Contract Duration and the Division of Labor in Agricultural Land Leases
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Short-term contracts provide weak incentives for durable input investment if post-contract asset transfer is difficult. Our model shows that when both agents provide inputs, optimal contract length balances weak incentives of one agent against the other. This perspective broadens the existing contract duration literature, which emphasizes the tradeoff between risk sharing and contract costs. We develop hypotheses and test them based on private grazing contracts from the Southern Great Plains. We find broad support for the implications of our model. For example, landowners provide durable land-specific inputs more often under annual versus multiyear contracts.