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File2-page109

# File2-page109 - p on output and the tenant’s payoff –...

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Asset Redistribution agricultural wages Now consider agricultural contracting problem of landlord and tenant – output depends on effort, R ( e ) , tenants have to be monitored to put in ef- fort on the land thus contract speciFes effort level e – tenant caught shirk- ing with probability p – payment schedule needed to induce effort level e at wage ϖ can be written as: w ( e , ) = v 1 p v ( 0 , )+ e p P the contract must now specify a payment/effort pair consistent with this schedule. The optimal effort that the landlord choose to induce is given by e ( p ) = argmax e = { R ( e ) w ( e , ) } it is easy to verify that e ( p ) is increasing. The tenant’s equilibrium payoff is V ( p ) = v ( 0 , ) + e ( p )( 1 p ) p , which is larger than the payoff from being a landless laborer. It is straightforward to calculate the impact of changes in
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Unformatted text preview: p on output and the tenant’s payoff – an increase in p will increase net-output since e ( p ) is increasing. The effect on the tenant’s payoff is given by: V ′ ( p ) = e ′ ( p ) 1 − p p − e ( p ) p 1 p 2 P the Frst term is positive – an increase in the eviction probability elicits higher effort and hence raises the tenant’s rent. The second effect works in the opposite direction – increasing p will decrease rent accruing to tenant at a given level of effort – hence expect overall payoff to be increasing in p Development Economics, LSE Summer School 2007 106...
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