Idea Transcript
Chapter 12: Land
Key Issues:
I Land rental market and forms of tenancy: sharecropping and xed rental
I Efciency of tenancy arrangements I Persistence of sharecropping: role of risk, incentives, and enforcement
I Negative relationship between farm-size and productivity I Land reforms
Contractual Forms
A landlord (with land in excess to what he can cultivate on his own) can use land for cultivation in following two ways: 1. Hire workers 2. Lease out his land If he can monitor the effort of workers, then he would hire workers and cultivate. But if we cannot monitor, then he would prefer to lease out his land. In this chapter, we will assume that the landlord cannot monitor the effort of workers, and thus leasing out land is the only option (implicitly we are also assuming that he does not want or unable to sell his land).
Contractual Forms
In the case, he leases out his land, he can choose between two forms of contracts: (i) xed-rent contract and (ii) sharecropping. Fixed-Rent Contract: The landlord charges a xed sum of money for the use of land. Sharecropping : The landlord receives a xed share of tenants output. The question is what form of contractual arrangement will be chosen and what are the implications?
Contractual Forms
Various contractual arrangements can be written in a succinct form as follows. Let R be the rent, Y , the output and, F , xed payment. R can be written as R If
= αY + F .
(12.1)
α = 0 and F > 0, then we have xed-rent contract. If F = 0 < α < 1 we have sharecropping. If α = 0 and F = −w
and 0
where w is the wage, we have wage contract.
Sharecropping and Marshallian Inefciency
Alfred Marshall argued that sharecropping is inefcient relative to xed-rent contract. By moving from sharecropping to xed-rent contract, output and economic surplus can be increased. In fact, xed-rent contract leads to efcient level of input use and output. The reason is that under sharecropping, the landlord receives a part of any extra output a tenant produces. This induces a tenant to undersupply his labor. Thus, sharecropping does not lead to appropriate provision of incentives. On the other hand, under xed contract, a tenant retains 100 percent of any extra output he produces. This induces a tenant to provide optimal amount of labor.
Empirical Evidence: Shaban 1987
Shaban (1987) provides empirical evidence on the inefciency of sharecropping. It studies the input use under different tenancy arrangements in eight villages in India. Data: Uses village level studies (VLS) data collected by ICRISAT. The study analyzes the input use by owner-sharecroppers, farmers who cultivate their own land as well as lease land. Null Hypothesis: Input use is same on both types of land. Alternative Hypothesis: Input use is higher on owned land. He nds substantial evidence of higher input intensity on owned land.
Persistence of Sharecropping
Previous analysis suggests that sharecropping is inefcient. This begs the question, why then sharecropping is so widespread? Main reason is that the previous theory ignores many realistic features, which make sharecropping a superior arrangement. These features are: 1. Risk and uncertainty 2. Double incentive problem 3. Cost of sharing inputs 4. Limited Liability 5. Screening
Risk, Tenancy, and Sharecropping
Agriculture production is inherently risky. Production can be high or low depending on weather. If a tenant is risk-averse, he would like to choose a tenancy contract which reduces risk, for a given rate of return. Sharecropping allows sharing of risk between the landlord and the tenant, which xed rent tenancy does not. Under sharecropping, if production is high, the landlord receives higher quantity of production. When production is low, the landlord receives lower quantity. In the case of xed-rent, the tenant bears all the production risk. Thus, in an economy in which tenants are relatively more risk-averse than the land-lords, sharecropping may be preferred form of tenancy.
Double-Incentive Problem, Cost Sharing, and Sharecropping
So far, we assumed that agricultural production does not require effort by the landlord. But if agricultural production depends both on the effort of the landlord as well as tenant, then sharecropping may be superior contract in order to elicit effort by both the landlord and the tenant. In the case of xed-rent, the landlord has less incentive to provide effort. Similarly, when input costs (fertilizer, irrigation etc.) are shared between landlord and tenant, then sharecropping may be superior contract than the xed-rent.
Limited Liability, Screening, and Sharecropping
Sharecropping may also be superior contract in the case that tenants are poor and in the case of crop failure they may not be in a position of pay the xed rent (default). This is the situation of limited liability. Limited liability encourages tenants to cultivate more risky crops (moral hazard). To avoid default and moral hazard problem, a landlord would like to charge less rent in bad state and high rent in good state. This is what sharecropping arrangement does. Sharecropping may also be used to differentiate between high quality and low quality tenants (adverse selection problem). Under certain conditions, it can be shown that low quality tenants would prefer sharecropping and high quality xed rent contract.
Land Contracts, Eviction, and Use Rights
So far, we have considered the problems of incentives and risk sharing in a static context. We found that it is very difcult for the landlord elicit rent maximizing effort by the tenant. But, once we allow for continuing relationship between the landlord and the tenant, the threat of eviction or non-renewal of contract provides an additional instrument to the landlord to provide incentive to the tenant. The threat of eviction may be widely used in case of (i) limited liability, and (ii) nonveriable information regarding tenant effort. However, the threat of eviction reduces the bargaining power of tenants. This reduces their incentive provide effort. Also they may be reluctant to undertake long-term productivity enhancement measures. If this second effect is strong enough, banning eviction of tenants may lead to higher output.
Farm Size and Productivity
Empirical evidence suggests that smaller farms are more productive (output per acre) than larger farms (inverse relationship between farm size and productivity). This inverse relationship can happen due to two reasons: 1. Imperfect Insurance Markets 2. Imperfect Labor Markets The inverse relationship between farm size and productivity provides a rationale for land reforms, which is redistribution of land from big land owners to smaller ones.