Pure wage contract get entire yield but must pay for land Alpha 1 F0 Conclusion

Pure wage contract get entire yield but must pay for

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Pure wage contract: get entire yield, but must pay for land. Alpha = 1; F<0 Conclusion: sharecropping is not Pareto efficient: by moving to a fixed rent contract it is possible to make the tenant better off while the owner is indifferent between the two contracts. So why is there still sharecropping? Risk aversion! Squatting/tribal/commune tenure ° Risk aversion ° Measure risk aversion by use of the utility function. Your utility increases more for lower incomes. ° Maximize expected utility at C’ ° Expected utility to ensure function = 0.5(2000)+0.5(10000)=u(6000) ° Person is risk averse?: divide deviation of unsure expected u by deviated expected utility function. ° Comparing two risky projects------------------------------------ ° Risk in agricultural production Downloaded by Vicky Gupta ([email protected]) lOMoARcPSD|3929542
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° Agriculture: size of harvest depends on “nature” with prob ° Assume landlord is risk-neutral – tenant is risk-averse. ° Therefore, must design a share contract that leaves owner indifferent but farmer better off than under a fixed R. ° p: prob outcome is good, (1-p): prob outcome is not good ° Sharecropping : Expected return is equal between contracts – spread (risk) of returns is reduced – share risk w/ others ° ° Share production risks – risk adverse farmer prefers sharecropping. Landlord can write contract that leaves farmer & himself better off than under fixed rent. ° Reduce risks, and still make sure production is done efficiency: tradeoffs of the different ways of doing it: look at underlying causes outside control of farmer in which you can insure. Insure against nature. ° This is efficient because it doesn’t affect the incentives of the farmers they will still put in as much effort because they want to make returns when weather is bad, BUT they can get help when weather is bad DOESN’T WORK – farmers don’t want to buy insurance (too poor to see the benefits of paying for something that doesn’t give you anything back financial literacy) ° Constraint: Need to have money to pay for insurance don’t outside of harvest period ° Alternative view: Eswaran & Kotwal (1985) – share cropping exists bc there isn’t a mkt for managers and supervisors ° Markets for some inputs needed for agricultural production are absent (particularly mkt for managers and land supervisors). ° Supervisors supervise workers. Managers decide on production levels etc. ° Fixed rent: tenant is manager and supervisor ° Fixed wage: owner is manager and supervisor ° Sharecropping: tasks are split Tenant is supervisor Owner is manager ° Theory of contracts: owner had comparative advg in mgt, the tenant in supervision ° Owner chooses: Fixed wage contract if difference in supervision capacities is small Fixed rent if difference in management capacities is s,all Sharecropping: otherwise: pool unmarketed resources.
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