Abstract

this paper we shall argue that custom is a real force in setting contract terms, even in modern economies (see Akerlof, 1980, 1997). The evidence that we marshal in support of this claim is based on a statewide survey of contract terms that prevailed on nearly one thousand farms in the state of Illinois in 1995. These data provide information on the contractual division of both outputs and inputs by each party as a function of the size of the farm and the quality of its soil. Conventional theories fail to explain certain key features of these data, particularly the observed spatial pattern of contract forms. There are regional "patches" where contractual terms are nearly uniform, separated by boundaries where contractual norms jump substantially from one set of terms to another. These regional customs are roughly related to average differences in economic fundamentals, but they mask the considerable amount of heterogeneity that exists within each region. We introduce a dynamic model of contract formation that explicitly takes the role of custom 3

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