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Rural Transformation And Institutions Notes

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RURAL TRANSFORMATION AND INSTITUTIONS 'Development Economics' Ray 1998 (Ch. 11 - 15) Chapter 11 - Markets in Agriculture


'An essential property of imperfect markets is that they are contagious o 'market failure in some sectors can lead to problems in other markets'


Efficiency failures: o Information:unobserved actions
- 'How can you be sure that low output is due to laziness rather than bad luck?'


Could be climate etc


Moral hazard o Information: unobserved types
- Can lend to groups of 4/5 farmers - cut off loan if any member defaults


May know more about each other - self select into 'safe groups' o Incentives: conflict with insurance
- 'Contracts based on indirect evidence create uncertainty for economic agents who dislike uncertainty, and this lack of insurance constitutes an inefficiency' o Incentives: short term contracts
- Employee can legally break a contract at any time


Little incentive to invest in employees o Undernourishment
 Lack of training o Enforcement: limited liability
- 'borrowers who are thus insulated may want to overinvest in risky projects, because ineffect, you bear the downside risk, not them.' o Enforcement: breaking agreements
- Courts of law to enforce such agreements may be non-existent


'Distribution of land holdings is likely to be far more unequal than the distrubion of labour endowments.' o 'small holders have excessive family labour, whereas owners of huge tracts of land have to leave most of their holdings uncultivated for want of labour.'
- So farmers with large amounts of land hire large amounts of labour


Share cropping often occurs


If land output perfectly certain - could raise rent until money value of what tenant was receiving from you was equal to whatever the tenant could get as his next best alternative


If output uncertain: o 'If the tenant is poor and risk averse, this uncertainty has a cost in addition to the opportunity cost of the tenant.'


'In many situations, it will not be worthwhile to introduce a monitoring scheme for labour unless a large number of labourers are to be hired.' o 'may be better to simply incur the transaction costs associated with land leasing' o 'thus tenancy may ↑as the inequality in land holdings becomes moderately unequal.' o Tenancy may be reversed ie 'small land owners renting out to big landowners who are in a better position to bear the fixed costs of supervision.'


'markets for certain inputs spring up when there is some imbalance in the ownership holdings of those inputs'


Existence of other agricultural inputs that might determine the functioning of the market for land and labour: o Eg animal power

o 'if one of these markets fails quite dramatically, the other two will have to compensate somehow.' o Rental market for animal power particularly vulnerable:

1. Rented animals overworked as renter has no stake in the animal

2. Everybody in a village tends to need bullock power at the same time o 'Families with sizeable bullock holdings will be in a position to lease land and hire labour.' o 'lack of a capital market might create a situation in which land and labour flew from those who have no access to capital to those who do'
- 'more flexible markets will attempt to adjust for the failings of less flexible markets' Chapter 12 - land


Lorenz curves for land: - substantial inequality in Asia but higher in Latin America o Although in a sense high population density places limits on inequality o A plot can only feasibly be so small


Latin America usually 'fixed-rent' - fixed sum of money to the landlord in return for the right to cultivate the land


Asia usually share cropping - agreed upon share of crop


'Typically, richer tenants engage in fixed rent tenancy, because the landlord is relieved of all risk' o Ie requires tenant to be willing to bear risks


Share cropping 'has particular value when the tenant is small and averse to risk' o Tenant is insulated to an extent against fluctuations


Land rental contracts: o Contractual forms
- Fixed rent contract
- Share cropping o Contracts and incentives
- Fixed rent superior to sharecropping?


'if the effort of the tenant cannot be monitored and controlled by the landlord, the tenant has an incentive to under supply his effort'

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