Lecture 8-3 econ

Lecture 8-3 econ - Lecture 8: Land Readings: Todaro,...

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Unformatted text preview: Lecture 8: Land Readings: Todaro, Chapter 9 Optional: Ray, Chapter 12 Land Who does the land belong to? Who should it be given to? Landlord-tenant? Or owner-cultivator? If it must be given to the cultivator, then why is this not done? How to give it to owner-cultivator? Land Main occupation of people in developing countries is agriculture Important to understand really well land markets Fact 1: land distribution is unequal: Table 9.2 Table 9.2 Distribution of Farms and Farmland by Operational Farm Size and Land Tenure Status In Selected Developing Countries in Asia and Latin America Land Main occupation of people in developing countries is agriculture Important to understand really well land markets Fact 1: land distribution is unequal: Table 9.2 Fact 2: 3 types of contract between landlord (L) and cultivator (C): Fixed rent: C pays L a fixed rent, and keeps the harvest Sharecropping: C and L share the harvest (e.g. 50/50) Fixed wage: L keeps the harvest, and pays C a fixed wage See next table for evidence Which contract is better? Why is there such variation? 3 types of contract (Shaban, 1987) Contracts and incentives Question: from the landlord’s point of view, what is the optimal contract? What does optimal mean? Maximum effort by the cultivator Solution: complete monitoring. But not possible: Other things to do Too costly Therefore, a more reasonable assumption is imperfect monitoring. Going back to the initial question: From the landlord’s point of view, what is the contract that will make the cultivator exert the most effort? Note: Principal-Agent theory Contracts and incentives C’s revenue is: αf(e)+w e: effort f(e): harvest Decreasing returns to effort, so f’>0, and f’’<0) α: share of the harvest kept by the cultivator w: wage obtained by the cultivator Examples: Fixed wage: ? Sharecropping: ? Fixed rent: ? Contracts and incentives C’s revenue is: αf(e)+w e: effort f(e): harvest Decreasing returns to effort, so f’>0, and f’’<0) α: share of the harvest kept by the cultivator w: wage obtained by the cultivator Examples: Fixed wage: α=0, w>0 Sharecropping: 0<α<1, w=0 Fixed rent: α=1, w<0 Cost of effort: c(e) with c’>0, c’’>0 Conclusion: C’s profit is: αf(e)+w-c(e) Contracts and incentives C’s profit is: αf(e)+w-c(e) The cultivator will then: max e [αf(e)+w-c(e)] 3 ways to solve this: Maths Intuition Graph Contracts and incentives: Math max e [αf(e)+w-c(e)] first derivatives must be equal to zero αf’(e)=c’(e) α=c’(e)/f’(e) Contracts and incentives: Math max e [αf(e)+w-c(e)] first derivatives must be equal to zero αf’(e)=c’(e) α=c’(e)/f’(e) If e ↑: c’(e) ?...
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This note was uploaded on 03/10/2012 for the course ECON 313 taught by Professor Iforget during the Winter '10 term at McGill.

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Lecture 8-3 econ - Lecture 8: Land Readings: Todaro,...

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