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Machinery investments represent a substantial portion of agribusiness firms’ costs . Because of high machinery costs , variable profit margins , and increasing competition , agribusiness managers continually seek methods to maintain profitability and manage risk . One relatively new method is jointly owning and sharing machinery . Contract design issues to enhance horizontal linkages between firms through machinery sharing are addressed . Specifically , costs and depreciation sharing between two firms entering into a joint machinery ownership contract are examined .
Two , two -player models , a Nash equilibrium game theoretical model and an applied two -farm simulation model are used to determine impacts of machinery sharing on firms engaged in machinery sharing . The Nash equilibrium model determines theoretical optimal sharing rules for two generic firms . Using the Nash equilibrium model as the basis , the two -farm simulation model provides more specific insights into joint harvest machinery sharing . Both models include contractual components that are uniquely associated with machinery sharing . Contractual components include penalty payment structure for untimely machinery delivery and the percentages of shared costs paid and depreciation claimed paid by each firm . Harvesting windows for each farm and yield reductions associated with untimely machinery delivery are accounted for within the models .
Machinery sharing can increase the NPV of after tax cash flows and potentially reduce risk . Sharing will , however , not occur if own marginal transaction costs and /or marginal penalty costs associated with untimely machinery delivery are too large . Further , if the marginal costs of sharing are small relative to own marginal net benefits , sharing will not occur .
There are potential tradeoffs between the percentage of shared costs paid and the percentage of shared depreciation claimed depending on each farms’ specific tax deductions . Harvesting window overlaps help determine the viability of machinery sharing . Farms may be better off sharing larger , more efficient machinery than using smaller machinery even when harvest must be delayed . Percentages of shared costs , depreciation , and tax deductions have important tax implications that impact the after tax cash flows and should be considered when negotiating machinery sharing contracts . |
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