Ownership and Tenancy The metayer [sharecropper] has less motive to - PowerPoint PPT Presentation

Ownership and Tenancy “The metayer [sharecropper] has less motive to exertion than the peasant proprietor, since only half the fruits of his industry, instead of a whole, are his own." John Stuart Mill (1848) Fall 2010 Huw Lloyd-Ellis () Econ 239 Fall 2010 1 / 23

Overview Distribution and ownership of land is central to rural development , ! functioning of the land market — ownership vs. tenancy , ! linkage to credit markets , ! linkage to labor markets , ! rural-urban migration Nature of tenancy — …xed rent vs. sharecropping , ! sharecropping: historically widespread “non-market institution” , ! currently still common in Asia , ! consequences for productivity , ! example of debate over role of institutions Huw Lloyd-Ellis () Econ 239 Fall 2010 2 / 23

Example: Tenancy in the ICRISAT Villages Discussed in Ray pp. 420-423 Sharecropping is dominant as a form of tenancy Wide variety of tenancy arrangements , ! 50–50 output shares, plus input cost sharing , ! 75% shares, plus tenant pays for all inputs “Reverse tenancy” is common , ! 32% of leasings are from small to large farmers , ! 47% between farmers that own similar sized plots Huw Lloyd-Ellis () Econ 239 Fall 2010 3 / 23

Is sharecropping associated with lower yields? Discussed in Ray pp. 430-431 Village surveys from ICRISAT , ! can compare owned and sharecropped land for same farmer Results: , ! sharecropped land 16% less productive (controlling for other factors) , ! no systematic di¤erences between …xed rental and owned land Why do we observe sharecropping if it so unproductive? Policy question: should the government ban sharecropping ? , ! Alfred Marshall (1881) on England vs. France Huw Lloyd-Ellis () Econ 239 Fall 2010 4 / 23

A Simple Analytical Framework Value of output: Y = g ( L ) , ! L = labour e¤ort , ! decreasing marginal product, MP Cost of e¤ort to Tenant: C ( L ) , ! increasing marginal cost, MC Huw Lloyd-Ellis () Econ 239 Fall 2010 5 / 23

Output, Production Function, g(L) Cost Labour MP Labour Figure: Production Huw Lloyd-Ellis () Econ 239 Fall 2010 6 / 23

Output, Production Function, g(L) Cost Cost Function, C(L) Labour MC MP Labour Figure: Production, Cost Huw Lloyd-Ellis () Econ 239 Fall 2010 7 / 23

Output, Production Function, g(L) Cost Labour L** MC MP Labour L** Figure: Production, Cost and Economic Surplus Huw Lloyd-Ellis () Econ 239 Fall 2010 8 / 23

Linear compensation schemes: Tenant’s income : I = ( 1 � α ) Y � F � C ( L ) R = α Y + F Landlord’s income : , ! pure wage contract : F < 0 and α = 1 , ! pure rental contract : F > 0 and α = 0 , ! sharecropping contract : F � 0 and 0 < α < 1 Huw Lloyd-Ellis () Econ 239 Fall 2010 9 / 23

The Negative Incentive E¤ects of Sharecropping Development Planning View Assume both parties are risk neutral Under sharecropping Tenant exerts e¤ort until: ( 1 � α ) MP = MC ) undersupply of e¤ort and low output relative to …xed rental Policy implication: remove sharecropping and replace with …xed rents Huw Lloyd-Ellis () Econ 239 Fall 2010 10 / 23

Output, g(L) Cost (1- α )g(L) C(L) Labour L** L MC Efficiency Loss MP (1- α )MP Labour L L** Figure: Ine¢ciency of Sharecropping Huw Lloyd-Ellis () Econ 239 Fall 2010 11 / 23

Output, g(L) Cost g(L) - F C(L) Labour L** MC MP Labour L** Figure: E¢ciency of Fixed Rental Contract Huw Lloyd-Ellis () Econ 239 Fall 2010 12 / 23

Sharecropping as an E¢cient Response to Risk Chicago School View If sharecropping is so ine¢cient, why is it so common? Risky production: � g ( L ) + x with probability 1 2 Y = with probability 1 g ( L ) � x 2 , ! average output: ¯ Y = g ( L ) . Tenant and Landlord are risk–averse , ! cost of risk is a transactions cost that varies with α Huw Lloyd-Ellis () Econ 239 Fall 2010 13 / 23

Total Cost of Risk Exposure MCR Exposure Figure: Marginal Cost of Risk Huw Lloyd-Ellis () Econ 239 Fall 2010 14 / 23

Landlord and Tenant can agree on e¢cent level of e¤ort, L �� , ! if Tenant does not provide this e¤ort, Landlord does not pay him Then choose value of α to minimize the total cost of risk to the two parties , ! since 0 < α < 1, sharecropping results as an e¢cient response to risk Policy implication: no need for government intervention Huw Lloyd-Ellis () Econ 239 Fall 2010 15 / 23

Cost of Risk Tenant Landlord α Cost of Risk Total Cost α α ∗∗ 1 0 Figure: Cost-Minimizing Sharecropping Contract Huw Lloyd-Ellis () Econ 239 Fall 2010 16 / 23

Problems Assumes away (1) negative incentives of sharing (2) cost of monitoring e¤ort Does not explain 50–50 splits when Landlord is wealthy (risk–neutral) Huw Lloyd-Ellis () Econ 239 Fall 2010 17 / 23

Sharecropping as an Incentive Scheme New Institutional View Assume for simplicity , ! Landlord is risk–neutral, but Tenant is risk–averse ) wage contract is optimal according to Chicago school , ! costly monitoring , ! cannot infer e¤ort due to risk ) trade–o¤ between risk and incentives Huw Lloyd-Ellis () Econ 239 Fall 2010 18 / 23

MC E MP Labour MCR 1−α Figure: Fixed Rent Case Huw Lloyd-Ellis () Econ 239 Fall 2010 19 / 23

MC E MP 1 ) MP (1−α Labour L 1 MCR 1−α 1 1−α Figure: Too Little E¤ort Huw Lloyd-Ellis () Econ 239 Fall 2010 20 / 23

MC E MP 2 ) MP (1−α Labour L 2 MCR 1−α 2 1−α Figure: Too Much Risk Huw Lloyd-Ellis () Econ 239 Fall 2010 21 / 23

MC A E B MP ∗ ) MP (1−α Labour L* MCR C D 1−α ∗ 1−α Figure: Constrained-e¢cient Sharecropping Contract Huw Lloyd-Ellis () Econ 239 Fall 2010 22 / 23

The incentive–constrained or second–best e¢cient value of α � is , ! decreasing in MP , ! increasing in MC , ! increasing in cost of risk Sharecropping is a rational response to risk and incentive problems BUT outcome not same as predicted by neoclassical theory (i.e. not e¢cient) Provides explanation of why sharecropping disappears as economies develop , ! cost of risk may decline with development — why? Policy implication: should not ban sharecropping, but should encourage institutional changes that reduce risk. How ? Huw Lloyd-Ellis () Econ 239 Fall 2010 23 / 23