Markets, Contracts, or Integration? The Adoption, Diffusion, and Evolution of Organizational Form

Abstract:     
The rise of contract farming and vertical integration is one of the most important changes in modern agriculture. Yet the adoption and diffusion of these new forms of organization has varied widely across regions, commodities, or farm types, however. Transaction cost theories and the like have done much in helping us understand the advantages of contracting and integration over the more traditional spot markets and commodity brokers. However, these theories are not fully effective at explaining the variation of adoption rates of different organizational forms, in part because of their inherent static nature. To explain the adoption, diffusion and evolution of organizational form a more dynamic framework is required. This paper lays out such a framework for understanding the evolution of organizational practices in U.S. agriculture by drawing on theories of the diffusion of technology and organizational complementarities. Using recent trends as stylized facts we argue that the agrifood sector is characterized by strong complementarities among its constituent features and that these complementarities help explain the stylized facts. We argue that research identifying complementarities within specific sectors of the agri-food system will greatly improve our understanding of the organizational structure of agricultural production. We illustrate our arguments with case studies from the poultry and hog industries.

Keywords: contracting, vertical integration, organizational innovation, diffusion

JEL Classifications: L14, L22, Q13, O33

Working Paper Series