controlled by the landlord the tenant has an incentve to undersupply his efort

Controlled by the landlord the tenant has an incentve

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controlled by the landlord, the tenant has an incentve to undersupply his efort, bc parts of the output has to e given away - The impositon of a fxed rent has no efect on the tenant incentves at the margin Use of other than fxed-rent contract leads to a distorton of the tenants input supply away from the efcient level Sharecropping leads to undersupply of the inputs A ratonal owner trying to maximize the earnings from land lease will always prefer a suitable fxed-rent to any share contract Risk, tenancy and sharecropping: - Uncertainty in agricultural producton Assume: landlord is rich and risk-neutral and tenant is poor and risk-averse; G = good outcome; B = bad outcome; R = rent to be paid; s = share of crop to give away; p = probability 1. Fixed-rent contract: G – R or B – R Downloaded by Vicky Gupta ([email protected]) lOMoARcPSD|3929542
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2. Sharecropping contract: G – s or b – s Sharecropping and fxed-rent tenancy are like two projects with the same expected value, but the spread of returns to tenant is narrower under sharecropping If the tenant is risk-averse he prefers sharecropping, because risk is shared here Situaton where labor is efectvely being hired rather than land being leased out - If both risk-averse -> sharecropping, but: incentve problem (Marshall) - > tension between the need to provide incentve and the need to insure the tenant - -> principal-agent problem - Soluton: combining both, partly sharecropping, partly fxed-rent, but also several counterobjectons Other consideratons: - Incentves & risk - Double-incentve problem: fxed-rent-> all incentve from tenant; wage labor -> all incentve from landlord => Marshiallian argument applies in both directons =>> sharecropping as compromise - Cost sharing of inputs: if several inputs are contractble and cost sharing can be used, then the relatve advantage of sharecropping is further heightened - Limited liability and sharecropping: when the tenant isn’t able to pay the fxed rent bc of poverty and output uncertainty -> rent has to be forgiven -> incentve for the tenant to overinvest in risky methods of producton -> counterbalance is for the landlord to lower the rent in bad states and raise it in good states - Screening: to identfy high-ability (fxed-rent) and low-ability (sharecropping) tenants - Land contracts, evicton and use rights: when nonrenewal or evicton is a possibility, the landlord acquires an additonal instrument through which efort incentves are provided Land ownership - Skewed relatonship btw land and labor: land rents and prices rose as it became scarce relatve to labor; major inequality in landholdings Concepts of land size and productvity: - Need to compare the inputs to identfy productvity in large and small farms; and productvity in the sense of market efciency - Technology: large plots of land can do just as good as smaller plots; quite neutral towards land size, but my favor large size bc of the possibility of excessive mechanizaton - Imperfect insurance markets: ownerships of small plots that are predominately farmed by family
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