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Tenurial Arrangements Notes

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How do tenurial arrangements affect agricultural production?
Ray talks about two different types of productivity; total factor productivity (do small firms have a production function that lies 'beyond' that of large firms?) and 'productivity in the sense of market efficiency'1 (do the values of the marginal product of all inputs equal true marginal costs?). Some tenurial agreements are more 'productive' in the sense of the first definition, and some are more 'productive' in the sense of the second definition. I will begin by discussing some of the advantages and disadvantages of various types of tenurial agreements in terms of agricultural productivity. Then I will discuss a number of models followed by some of the conclusions from the empirical evidence on the matter. I will begin by comparing two of the main tenurial agreements used; fixed rent and sharecropping. Rent can be shown to follow the following equation: R = αY + F
α = share of the crop to the landlord Y = agricultural output F = fixed rent R = rent If α = 0 and F > 0 the tenurial arrangement of 'fixed rent' will occur. If 0 < α < 1 and F = 0 the tenurial arrangement of 'sharecropping' will occur. If α = 0 and F < 0 a 'pure wage' will be paid to labourers. Under a fixed rent system, all of the risk is taken on by the tenant, whereas in a sharecropping system the risk is shared between the landlord and the tenant. However, there is a 'fundamental trade off between the provision of incentives and the provision of insurance.' 2 This implies that, although risk is reduced for the tenant under sharecropping, there is a 'dampening of incentives that results from sharecropping.'3 So, 'sharecropping can be viewed in part as an institutional adaptation to the absence of certain risk markets,'4 however, this is unlikely to be optimal. The share contract might not necessarily be better 'for example, if the tenant is close to being risk neutral, the landlord may not find it worthwhile to sacrifice incentives for labour input by using a share contract.' 5 So, if there is sufficient risk aversion on the part of the tenant, it is more likely that they will favour sharecropping. Furthermore, 'share contracts may not be inefficient in a repeated context: the incentive problem is fully dealt with.'6 I will discuss this in more detail later with respect to the screening model. A risk averse tenant will prefer sharecropping because 'sharecropping and fixed rent tenancy are like two projects with the same expected value, but the 'spread' of returns to the tenant is narrower under sharecropping.'7 In a fixed rent contract, the tenant will take all of the risk, whereas in a pure wage contract, the landlord will take all the risk. Sharecropping is an intermediate outcome where the risk is shared. Sharecropping may be preferred when the input costs are shared between the landlord and the tenant. For example, if some fraction, say a half, of marginal output is taken by the landlord the tenant equates 1/2MPL=MC not MPL=MC, resulting in an inefficient outcome. For these reasons, 'typically, richer tenants engage in fixed rent tenancy, because the landlord is relieved of all risk' 8 and sharecropping 'has particular value when the tenant is small and averse to risk.' 9Figure 1 shows 1 'Development Economics' Ray 1998 2 'Development Economics' Ray 1998 3 'The Economic Theory of Agrarian Institutions' Bardhan 1989 4 'The Economic Theory of Agrarian Institutions' Bardhan 1989 5 'The Economic Theory of Agrarian Institutions' Bardhan 1989 6 'The Economic Theory of Agrarian Institutions' Bardhan 1989 7 'Development Economics' Ray 1998 8 'Development Economics' Ray 1998 9 'Development Economics' Ray 1998

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