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

Production Function, g(L) Labour Output, Cost Labour MP

Figure: Production

Huw Lloyd-Ellis () Econ 239 Fall 2010 6 / 23

Production Function, g(L) Cost Function, C(L) Labour Output, Cost Labour MC MP

Figure: Production, Cost

Huw Lloyd-Ellis () Econ 239 Fall 2010 7 / 23

Production Function, g(L) Labour Output, Cost Labour L** MC MP 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) Landlord’s income : R = αY + F , ! 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

g(L) (1-α)g(L) Labour Output, Cost Labour L** MC MP L** L Efficiency Loss L (1-α)MP C(L)

Figure: Ine¢ciency of Sharecropping

Huw Lloyd-Ellis () Econ 239 Fall 2010 11 / 23

g(L) C(L) Labour Output, Cost Labour L** MC MP L** g(L) - F

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: Y = g(L) + x with probability 1

2

g(L) x with probability 1

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

MCR Total Cost

• f Risk

Exposure 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

• f Risk

α α 1 Tenant Landlord Total Cost α∗∗ Cost

• f Risk

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

MCR Labour 1−α MC MP E

Figure: Fixed Rent Case

Huw Lloyd-Ellis () Econ 239 Fall 2010 19 / 23

MCR Labour 1−α MC MP (1−α

1)MP

L1 1−α

1

E

Figure: Too Little E¤ort

Huw Lloyd-Ellis () Econ 239 Fall 2010 20 / 23

MCR Labour 1−α MC MP (1−α

2)MP

L2 1−α

2

E

Figure: Too Much Risk

Huw Lloyd-Ellis () Econ 239 Fall 2010 21 / 23

MCR Labour 1−α A B C D MC MP (1−α

∗)MP

L* 1−α

∗

E

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