| Theories of Tenure Choice: A Survey and Evaluation By: P.O. Lee polee@rocketmail.com November 1993 Draft Only. Please Do Not Quote. Outline 1. Introduction 2. The Classical View 2.1 Stages Approach 2.2 Incentives and the State of the Economy 3. The More Recent View 3.1 Property Rights, Transaction Costs, and Riskiness 3.2 "Free Attributes", Information Costs, and Contracting 3.3 Monitoring and Agency Costs 3.4 Incentives and Tenure Choice 4. Summary and Conclusion |
1. Introduction
Neo-classical economists have traditionally devoted little attention to the study of tenure choice. Johnson (1950) changed all this by challenging the conventional view that share tenancy was economically inefficient. Since then a voluminous amount of literature has emerged explaining the existence of and reasons for choosing different types of tenure.1 This essay surveys some of the major explanations of optimal tenure choice and highlights and evaluates some of the ideas contained therein.
Basically, a survey of the literature of tenure choice involves a study into the following factors and their impact on decision making of all parties concerned. Some of the factors which influence decision making on tenure choice are the incentives prevailing for the worker/tenant and the landlord, and the monitoring (agency) costs. Others factors include transaction costs associated with the different conditions existing in different situations, the risk aversion of the tenant or the landlord, and the institutional and the economic environment prevailing. A number of theories have been put forward incorporating these factors into their hypothesis. Not all of these theories are foolproof as this survey will show. In this regard, the following questions will be asked: Why is one form of tenure contract chosen over another? Is this due to economic factors, physical/environmental factors, institutional factors or sociological factors? On a deeper plane, are some of the assumptions made in these studies of tenure choice valid? If some of these assumptions were dropped, would the explanation still hold? Is there empirical evidence to support the assertions or hypotheses made in these studies?
It will be seen in the following sections that the issue of tenure choice is indeed very complex. In surveying the different explanations of tenure choice, different assumptions made by the various authors have been used to explain the different phenomenon prevailing in different countries. Also, the different factors chosen to explain the phenomenon of tenure choice only shows that there is more than one simple explanation to the whole matter. What are the similar themes which can be drawn from these explanations? Is there a single factor or are there a host of factors needed to explain tenure choice? Besides surveying these explanations, this essay would also draw out the similar themes and seek to find a coherent theory of tenure choice; if one exists.
The outline of this essay is as follows. The classical view on tenure choice will then be deliberated in the next section.2 This will be followed by the neo-classical view of tenure choice. A summary and conclusion then follows.
2. The Classical View
Surveys of the classical doctrine on tenure choice have been provided by Cheung (1969a), Currie (1981), and Jaynes (1984). One major theme highlighted by these authors is the strong criticism of classical doctrine on sharecropping. This is because the marginal conditions between rewards to and efforts of the tenant have been distorted in this arrangement. This distortion in turn led to inefficiency of the whole set-up and the consequent misallocation of resources.
What is the contribution of the classical doctrine to an understanding of tenure choice? The classical doctrine attributes tenure choice to the conditions existing within the economy; that is, the sophistication of the credit market, and the existing institutions (which in turn promoted a certain type of market organisation). The classical school of thought also has the view that tenure choice is not so much determined by factors but rather influenced by the conditions or circumstances existing during that time: an approach based on realism. It therefore tended to adopt a chronological-evolutionary view of tenure choice; a "stages" type of approach.
2.1 Stages Approach
A good discussion of Adam Smith's ideas in relation to the different stages of progression of tenure choice has been provided by Cheung.3 Smith saw the sharecropping (métayage) system as an intermediary stage before the establishment of the fixed rent system; with the stage prior to sharecropping being the "slave" cultivators or wage labour stage. Hence, there were three progressive stages: the wage labour stage, the sharecropping stage,4 and the fixed rent stage. According to Smith, productiveness would increase with each stage5. This view was also shared by others during this era like Richard Jones and John Stuart Mill.6 Implicit in the stages approach is the fact that these tenure system would evolve as the economy developed. It should also be noted that Smith favoured a system of fixed rents with a lease for life against sharecropping.7
The stages approach during the classical era has had a mention even during the 1970s in a paper by Hallagan (1978)8. Hallagan's paper adds a different dimension to the stages theory. Basically, Hallagan has related the different types of tenure system to the different levels of entrepreneurial ability and challenged one conventional view that tenure choice was dependent mainly on the level of risk averseness.
2.2 Incentives and the State of the Economy
Incentives for wealth and the current level of economic development are two factors which also play an important role in the choice of tenure. This is the macro-economic perspective of tenure choice. Jaynes (1984) points out that the tenure choice is based on the incentive to acquire wealth; the level of wealth increasing as the tenure choice progressed from the wage contract to the share contract and finally to the fixed (money) rent contract. The choice of tenure is dependent on the sophistication of the economy and the existing institutions. In Jaynes's words:
A well-developed system of money rent requires not only a well-organized credit market but also a class of tenant-cultivators wealthy enough either to self insure or to obtain market insurance on their income streams. According to the classical doctrine, the choice of tenure will be dictated by the most efficient available arrangements that are compatible with the state of economic development and existing market institutions.9
The incentive for wealth plays a great role in influencing the choice of tenure. Jaynes cites Adam Smith's writings to support the proposition that the sharecropping system which divided output between landowner and tenant would never be satisfactory as the tenant would have to share a portion of his marginal effort with the landlord who did contribute any effort at all. Hence, the fixed rent system is seen as the most desirable stage and the incentive for wealth maximisation would ultimately lead to this stage. Why is there no direct transition which bypasses sharecropping? Jaynes points out that there was no direct transition from the wage contract to the fixed rent contract as "share tenancy is necessitated by the tenant's lack of capital and, presumably, lack of capital".10 This lack of capital can be seen in Turgot's works. Turgot attributed sharecropping to the level of poverty which existed during those times.11 This level of poverty limited the tenants ability to buy land or to have capital to start out on their own ventures; hence share cropping was seen as the only viable option. Jaynes provides a succinct summary of classical doctrine in the following manner:
... the classical economists all argued that the efficiency attributes of various tenancies differ and that these tenancies can be ranked. They believed the type of tenancy chosen would be the most efficient mode available, subject to the constraints of available institutions and markets and the circumstances of prospective tenants. The two determinants of the choice of share renting they stressed most were the need for credit by tenants unable to obtain it in a specialised credit market and the incentive that a receipt of a share of the crop gives the tenant to work hard, thus lessening the supervision costs (transaction costs) of the landlord.12
3. The More Recent View
The neo-classical view represented a radical departure from the classical doctrine by stating that sharecropping was an efficient arrangement just like any other form of tenure. Besides challenging the efficiency criterion, it also offered many new reasons for choosing the different forms of tenure.
Johnson (1950) was the first to suggest that the classical doctrine of sharecropping was wrong. According to Johnson, classical doctrine has ignored the issue of "how the tenant determines the amount of land to rent."13
In sharecropping then, why is the tenant willing to pay the landlord a portion (say one-third) of the total product for the use of the land which at the margin returns nothing to him? According to Johnson:
The return to labor, after payment of the rent, is equal to its wage and presumably the value of its marginal product in alternative uses.14
After making a decision on the amount of land to rent, the landlord and tenant would contract in such a manner as to make sharecropping function reasonably well. This is achieved by exactly specifying the functions of the tenant, sharing the payment of input expenses in the same proportion of sharing output (thus inducing a more rational allocation of inputs), and granting only a short term lease which serves as a check-and-balance measure on the tenants's behaviour. Together, these factors, especially the short-term lease, would ensure that land is used properly and resource allocation efficiently effected.15
3.1 Property Rights, Transaction Costs and Riskiness
Cheung (1969a) has added to the depth of Johnson's argument. Cheung constructed a model which demonstrated that resource allocation is efficient regardless of the choice of tenure with the preconditions that private property rights exist and that a free market16 is allowed to operate. [This was also expounded in Cheung (1968).]17 When these two preconditions exist, the various parties can bargain with one another before accepting the terms of a contract (regardless of the type of contract) and as a result come up with an optimal solution which is economically efficient. In proving the above, Cheung assumes that there is a zero cost of contracting.18 This has widespread ramifications in understanding tenure choice. Given that resource allocation is efficient regardless of the type of contracts, then the view of the classical tradition that sharecropping is inefficient has no basis at all.19 What then determines that a certain type of contract is chosen given that all forms of tenure are equally efficient? Cheung (1969b) offers a choice-theoretic approach based on non-zero transaction costs and risk aversion to explain the observed contractual behaviour in agriculture.20 In offering this approach, Cheung then advances the following hypothesis:
... the choice of contractual arrangement is made so as to maximize the gain from risk dispersion subject to the constraint of transaction costs.21
If transaction costs are given, and assuming that an individual is risk averse, then the share contract would be chosen as it would distribute the variance of the output amongst the contracting parties. This is Cheung's central focus. In the choice of contracts, there is therefore a trade-off between risk aversion and the different level of transaction costs associated with the different types of contracts. The following table summarises the tradeoff (risk and transaction costs) involved among the various types of contracts:
Risk Transaction Costs
of Monitoring/Enforcement
Fixed Wage Low for Worker Medium for Landlord
High for Landlord
Sharecropping Medium for Tenant High for Landlord
Medium for Landlord
Fixed Rent High for Tenant Low for Landlord
Low for Landlord
Cheung then uses empirical evidence to support his hypothesis that the share contract was chosen to disperse the risk of variations. This was done in his study of Taiwan.22 Barzel (1989), however, has challenged this view and argued that risk aversion is a matter of taste. Risk then becomes a personal matter that may vary unpredictably across individuals and a explanation based on risk aversion can be discredited.23 Indeed, Hallagan (1981) cites the study by Rao who found that sharecropping in India was carried out with a less risky crop rather than the riskier crop. This suggests that the hypothesis formulated by Cheung may not be entirely correct.24
A study by Allen and Lueck (1992) has also contradicted Cheung's risk averseness hypothesis. The risky crops were determined using a coefficient of variation test to ascertain the high variance crops from the low variance crops.25 After this was determined, a logit correlation test was done to test the strength of the relationship between risk averseness and output variability. However, the estimated logit coefficients in their study show no strong correlation between risk aversion and sharecropping.26 They then conclude that risk sharing is not a useful variable for explaining contract choice. In fact, their study showed that fixed or cash-rent contracts were chosen when the crops suffered more variability in output. This is because the variability of a crop presents difficulties in policing output which then leads to the choice of fixed rent contract. Variations in contracts are determined by the costs incurred in enforcing these contracts.
3.2 "Free Attributes", Information Costs, and Contracting
Barzel (1989) offers a critical review of the traditional relationship between the tenant and the landlord. In his study, Barzel formulates the complexities involved this relationship into a transaction costs approach. Barzel highlights the fact that agricultural output is extremely difficult to ascertain: weather, pests, and other factors affect output differently in different periods and in different locations.27 According to Barzel, characteristics of variability incurs different levels of transaction costs onto different parties. This in turn is crucial to the type of contract chosen.
According to Barzel:
When transacting is costly, however, all contract forms are costly; and in that sense sharing may be chosen or not, or at least not only, for its effect on risk but also because of some properties of transaction costs.28
Barzel in turn offers a transaction cost (information costs) hypothesis to sharing. Barzel notes that land and labour are not uniform. Tenants who can gain from exploiting those attributes that they are not charged for (referred to as "free attributes") will overuse them to the point until the net gain is zero.29 Similarly, any changeable land attribute under the landlord's control will be undersupplied. A contract is therefore needed to ensure that resources are efficiently used; that is, to minimise the loss associated with the use of free attributes by the tenant or the landlord. In Barzel's words:
Although by assumption the loss associated with free attributes is too costly to avert directly, it can be controlled in tow distinct general ways: by altering contract stipulations regarding attributes related to the ones subject to excessive exploitation or inadequate provision, or by switching to an altogether different contract that directly controls those attributes left uncontrolled under the first contract.30
As a solution to minimise loses, Barzel points out that the party more inclined to affect the outcome by varying the use of the attribute should be put in control of that attribute, becoming the residual claimant of its variability. If this happens, misallocation will be minimised. Take, for example, soil nutrients as an attribute. If land belongs to the landowner, the condition of the land would not be misused by the landowner who stands to be the residual claimant. However, if it is rented out, the tenant would tend to overuse the soil nutrients without any regard to its condition as a rent has already been paid for the use of the land.
3.3 Monitoring and Agency Costs
Roumasset and Uy (1987) have added to the complex issue of tenure choice by arguing that the rigid classification of the various forms of tenure made by neo-classical economists has not been entirely useful in understanding the optimal tenure choice.31 Instead, they propose the use of an inductive approach to study tenure choice. This approach views the different tenure forms as different types of agricultural firms according to their degree of specialisation and the division of the residual among the parties involved. In using this approach, they develop a principal-agency framework (agency theory)32 to construct a theoretical relationship between the degree of separation between labour, management and land quality. Basically, their approach uses the concept developed by Alchian and Demsetz (1972) who stated that the formation of efficient economic organisations can only occur with the precondition that metering capabilities exist (the existence of a monitor). Therefore, rewards/residuals will accrue to the rightful parties involved.33
Using a variation of the principal-agency model and the concept of agency costs,34 Roumasset and Uy explain the observation that the frequency of share tenancy increased with land productivity.35 They came up with the following explanation. Land with high productivity would tend to be over-depleted (land shirking) if it was on a fixed rent contract and especially on a short-term basis. This is because the agent would get the residual payment by over-exploiting the land. Therefore, land with high productivity would tend to be managed by the owner themselves or at least partly supervised and controlled via a share contract. Hence, a high land productivity of the land plays a part in influencing the type of tenure organisation.36
In studying the setting of agricultural economies, Otsuka, et al., (1992), along the same vein of agency cost theory, highlights that risk sharing ranks highly in the peasant's choice of tenure. Another major characteristic highlighted is the high enforcement costs of supervising labour employment which in turn propagates small farms and limit the growth of plantations in Asia. The high enforcement costs also leads to the use of family members as part of the labour force instead of casual labour whenever possible.37 Also, the underdeveloped structure of markets due to poor infrastructure results in the segmentation of markets into small units. The small size of the markets does not allow the use of "modern marketing practices aimed at reducing uncertainty about product quality."38 The authors then go on to use economic theory to expound on some stylised facts observed in agrarian economies; for example, the predominance of sharecropping among the other forms of contract is noted in Asia. In particular, Otsuka, et al. note the following:
It must be pointed out, however, that existing studies do not pay sufficient attention to the characteristics of households, market conditions, and the community structure that would determine relative contractual efficiency and contract choice, such as the endowment of land and other family resources including management skills and the ability to enforce land and labor contracts, the operation of market for land, access to credit markets, and community ties.39
Otsuka, et al., then develop a basic one-period model of land tenancy and labour employment contracts based on the theory of the principal-agent relationship (agency theory). They highlight the conflicting interests present between the principal and the agent in that the principal wants the agent to work harder but the agent finds disutility in doing so. Because of the unmeasurable production effects of other factors, the principal sometimes cannot attribute the level of output on the effort of the agent or to these uncertain factors. The authors show from their model that the choice of contract is dependent on the enforceability of the tenant's or worker's effort and the risk aversion between the parties.40
However, Bardhan (1984) has challenged the view that sharecropping arises out of monitoring (agency) costs alone. He suggests that market imperfections also play an important role in sharecropping.41 This may take the form of risky wage fluctuations as well as fluctuations in output. To insure themselves against fluctuations in wages, workers may choose sharecropping to reduce risks. Another factor which contributes to sharecropping is an inadequately developed credit market. The landlord provides a loan to the credit-poor tenant who would only needs to repay this loan when the harvest season comes. Another factor in favour of sharecropping is the indivisibility and imperfect marketability of some factors of production. For example, draft animals and other agricultural implements may be better used if it is shared between the landlord and the tenant. In the absence of a market to hire these services out, sharecropping is seen as a viable option to better use these endowments of the landlord's.
3.4 Incentives and Tenure Choice
In their empirical study of agricultural contracts, Allen and Lueck (1992) have developed a model which stresses the differential incentives associated with the various contracts. It should be noted, however, that their model only looks at the choice between sharecropping (termed as "cropshare" in their paper) and fixed rent contracts (termed as "cash-rent" contracts). They seek to explain why share contracts have remained in spite of the level of development in the American economy (Nebraska, South Dakota, and the entire Midwest); contrary to the classical doctrine that share contracts would disappear as economies develop. Allen and Lueck discover that landowners seldom monitor farmers.42 They incorporate this into their model by assuming that monitoring costs are zero; therefore resources are allocated by incentives present in the two types of contracts. To further emphasise the incentives effect, they initially assume that risk averseness is not present. They formulate the hypothesis that contracts are organised to reduce losses from input distortions (overutilising inputs that cannot be easily monitored by the landlord)43 and output-division costs44. The trade-off between input distorting costs and output-division costs determines the type of contract chosen; the contract chosen will be the one which yields the highest level of output net of costs to both parties. Sharecropping will be chosen when the costs associated with output-division are low (when there is little problem with monitoring the output) and when costs associated with input distortion are high.45 The fixed rent contract, on the other hand, will be chosen when the output-division costs are high (difficulty in monitoring output) and the input distortion costs are low. With risk averseness taken onto account, Allen and Lueck generate the following results. If both the landowners and farmers are risk averse, the farmers would prefer a sharecropping in order to reduce the variance in his income. The landowner on the other hand would prefer a fixed rent contract to reduce variations in his income.
4. Summary and Conclusion
On the whole, the classical doctrine tends to more realistic in its approach. It has adopted both micro- and macro-economic reasoning to understand the concept of tenure choice. The marginal efficiency concept developed during the classical era is invaluable in clarifying the issue of tenure choice and it is from this concept that the newer neo-classical theories have emerged and evolved. There was also a stronger connection between the micro-economics and macro-economics of tenure choice in the classical doctrine. By this, it is meant that tenure choice was not only described in abstract marginal concepts but also related to the situation (the financial sophistication and state of development) existing during those times.
The neo-classical view, on the other hand, tends to abstract from reality and, in doing so, sometimes emerge with conflicting hypotheses. This is not as bad as it looks. Neo-classical theories by focussing on one factor or a combination of factors represents a brave move towards trying to create a coherent theory of the optimal tenure choice. Could a coherent view be drawn from the survey? In spite of the realism (excellent empirical studies done by some of the writers above) injected into some of the explanations, the studies have indeed failed to come up with an acceptable explanation of optimal tenure choice. The empirical section of some of these studies have also tended to be too situation-specific and country-specific though it is not the fault of the authors. Could the study of tenure choice be so complex that no theory could generalise or explain? This is certainly the case with new literature always emerging (sometimes with increased sophistication), but offering no new answers at all. What is offered is a "different combination" of existing factors used in other previous studies, or some new assumptions or factors which is claimed to be extremely important. Sadly, this in turn perpetuates further confusion about the theory of tenure choice rather than clarifying the issue.
On a positive note, it should be noted that some these studies are very useful. Common factors or themes have been identified although it has been shown that it is dangerous to be dogmatic about the causal relationship of some factors. Also, a clearer explanation of a phenomenon can only emerge when there is lively debate on an issue. In debating issues of tenure choice, it is important not to get lost in the mass of assumptions, ideas and concepts. Instead, it is also hoped that a more coherent solution could be found. Given time, a logical schema could be worked out from these body of theoretical and empirical findings thus far. It is important to remain open to new ideas, and to search deeply into the theory of tenure choices so far existing and study in detail the factors affecting tenure choice. It is also important sometimes to see the trees from the wood. What may be needed is not so much a new perspective but perhaps a detailed investigation into some ideas already contained in some of these published works.
Bibliography
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Johnson, D.G., "Resource Allocation Under Share Contracts", The Journal of Political Economy LVIII, No. 2 (April 1950): 111-123.
Lucas, R.E.B., "Sharing, Monitoring, and Incentives: Marshallian Misallocation Reassessed", Journal of Political Economy 87, No. 3 (June 1979): 501-521.
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Roumasset, J., "Explaining Patterns in Landowner Shares: Rice, Corn, Coconut, Abaca in Philippines" in Binswanger, H.P., and Rosenzwig, M.R., editors, Contractual Arrangements, Employment, and Wages in Rural Labor Markets in Asia. New Haven: Yale University Press, 1984.
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1 The literature on tenure choice has generally tended to dichotomise contracts into three forms. This takes the form of a wage contract, a fixed rental contract, and the share contract. Basically, the wage contract is one where workers are engaged by the landlord or principal tenant and are paid a fixed amount of wages for their services. The fixed rent contract, on the other hand, is one where the tenant pays the owner a fixed sum of money (or in kind) for the use of land. In the share contract, the landlord allows the tenant to work the land (and in certain cases may even supply a portion of the necessary inputs) for an agreed share of the total output.
2 Why was the classical doctrine against sharecropping? Basically, it was the inefficiencies engendered in sharecropping. Sharecropping violated the marginal efficiency conditions of the tenant which in turn resulted in a misallocation of economic resources. Marginal efficiency conditions necessary fore efficient production cannot be satisfied under sharecropping as the cultivator only received a portion of his output and paid the remainder to the landlord as agreed in the share contract.
3 Cheung, S.N.S., The Theory of Share Tenancy: With Special Application to Asian Agriculture and the First Phase of Taiwan Land Reform. Chicago: The University of Chicago Press, 1969a, pp. 32-42.
4 Smith also saw a similarity between sharecropping and taxes. Cheung however points out that this analogy made by Smith between sharecropping (métayage) and tax is misleading and that it has led succeeding writers astray by focusing their analysis on the inefficiencies of a tax system and relating this tax parallel argument to share cropping. See, Cheung, 1969a, op. cit., pp. 59-61. Basically, the rigidities present in a tax system are simply not present in a sharecropping system. Cheung, S.N.S., "Private Property Rights and Sharecropping", The Journal of Political Economy 76, No. 6 (Nov/Dec 1968), p. 1120, notes one major difference between taxes and sharecropping. In sharecropping, the percentage shares and areas rented are not determined in a fixed sum like taxes (which is determined by some central authority) but competitively set with the aim of maximising wealth between the parties. Therefore sharecropping, unlike the tax analogy, allows for an efficient allocation of resources.
5 Cheung, 1969a, op. cit., pp. 32-33.
6 Currie, J.M. The Economic Theory of Agricultural Land Tenure. Cambridge: Cambridge University Press, 1981, p. 25.
7 Cheung, 1969a, op. cit., p. 33.
8 Hallagan, W., "Self-Selection by Contractual Choice and the Theory of Sharecropping", The Bell Journal of Economics 9, No. 2 (Autumn 1978), p. 345 termed it the "Agricultural Ladder Hypothesis".
9 Jaynes, G.D., "Economic Theory and Land Tenure" in Binswanger, H.P., and Rosenzwig, M.R., editors, Contractual Arrangements, Employment, and Wages in Rural Labor Markets in Asia. New Haven: Yale University Press, 1984, p. 45.
10 Jaynes, op. cit., p. 47.
11 ibid., p. 49.
12 ibid., p. 52.
13 Johnson, D.G., "Resource Allocation Under Share Contracts", The Journal of Political Economy LVIII, No. 2 (April 1950), p. 114. In making this decision, the tenant makes adjustments between his marginal returns of land, and rent payable such that his returns are maximised. Intuitively, in normal situations, the renter when renting additional land would equate his marginal return from land to the marginal cost of renting the land. In share tenancy, however, the marginal cost is only a portion (say one-third) of the marginal product. Therefore in share tenancy, the equality between marginal return and marginal cost can exist only when the value of the marginal product is zero. A position of maximum profit is reached when a marginal unit of land neither adds to a tenant's profits or to his costs; ibid. p. 115.
14 ibid., p. 116.
15 Johnson, op. cit., p. 119.
16 Cheung, 1969a, op. cit., p. 64, points out that competition for and transferability of the ownership right perform two main functions for contracting. First, it combines knowledge (of alternative contracts and resource use) from all potential owners with transferability of property rights ensuring that it would be put to its most valuable use. Second, competition reduces the transaction costs of enforcing the stipulations in a contract. This is because competing parties will stand by to offer or accept similar terms.
17 Silberberg, E., The Structure of Economics: A Mathematical Analysis (Second Edition). New York: McGraw-Hill Publishing Company, 1990, pp. 607-611, presents a clear geometric reiteration of Cheung's criticism of Adam Smith's tax-equivalent approach and also provides a mathematical proof that sharecropping is consistent with pareto conditions (that is, the marginal product of labour being equivalent to the going wage rate).
18 Cheung, S.N.S., "Private Property Rights and Sharecropping", The Journal of Political Economy 76, No. 6 (Nov/Dec 1968), p. 1110. Cheung also uses mathematics (ibid., pp. 1113-1114) to prove that under sharecropping, the rent per acre of land equals the marginal product of land in equilibrium; a condition which also exists in the fixed-rent contract. For the wage contract, Cheung proved that the marginal product of tenant labour is equal to the wage rate: a condition identical to the wage contract.
19 However, it should be noted that Cheung's model only works in a first best situation where markets are perfect and information costless. Hence there is not much realism here.
20 Under the risk postulate, an individual seeks to avoid risk if the benefit gained from risk aversion exceeds the cost of doing so. Risk could be averted in tenure choice by sharing the agricultural outcome with the landlord (sharecropping) and hence dispersing the risk. Transaction costs would also affect tenure choice; negotiation and enforcement in sharecropping would be the most complex among the three types of contract incurring the highest transaction costs. Different physical conditions, nature of the inputs and outputs, institutional and political factors play a role in influencing the costs incurred for each transaction. This in turn would then play a role in influencing the type of contract.
21 Cheung, S.N.S., "Transaction Costs, Risk Aversion, and the Choice of Contractual Arrangements", The Journal of Law and Economics XII, No. 1 (April 1969b), p. 25.
22 Cheung, op. cit., 1969a, chap. 4 and esp. pp. 70-71.
23 Barzel, Y., Economic Analysis of Property Rights. Cambridge: Cambridge University Press, 1989, p. 31.
24 Nevertheless, Hallagan does not say if transaction costs, the other element of Cheung's hypothesis, were such that it outweighed the benefits gained from reduced risks and hence the result of this opposite outcome.
25 Allen, D., and Lueck, D., "Contract Choice in Modern Agriculture: Cash Rent Versus Cropshare", Journal of Law and Economics XXXV, No. 2 (October 1992), p. 416
26 ibid., pp. 418-419.
27 Barzel, Y., Economic Analysis of Property Rights. Cambridge: Cambridge University Press, 1989, p.28.
28 ibid., p. 31.
29 ibid., p. 34.
30 Barzel, op. cit., pp. 34-35.
31 Roumasset, J., and Uy, M., "Agency costs and the Agricultural Firm", Land Economics 63, No. 3 (August 1987), p. 291.
32 How can agency theory be related to the theory of tenure choice? Basically, the theory of tenure choice involves monitoring costs which in turn involves a study of the enforcement costs of the different types of contracts. The optimal contract be determined given the different incentives existing and the risk aversions of the individuals.
33 According to Alchian and Demsetz, the types of economic organisations formed (owner-used, rented or sharing costs and profits) are related to the nature of the conditions which allow for the ease or difficulty in monitoring inputs and outputs.
34 It might be added that agency costs arises because of the conflicting interests between parties (principal and agent) of which the agent's actions cannot be easily monitored by the principal and where the outcome is not only influenced by the agent's effort alone but by factors beyond the control of the agent. Agency theory is therefore concerned with designing an optimum contract between the agent and the principal of which it is usually assumed that the agent is more risk averse. The optimum contract therefore balances between providing work incentives for the agent and reducing his risk exposure as well.
35 Roumasset and Uy, op. cit., p 293. This substantiates an earlier study by Roumasset (1984) which showed a positive correlation between variations in landowner shares and the quality of land.
36 Roumasset and Uy,op. cit., p. 300 cautions against inordinately correlating land productivity to tenure choice as their study also incorporates production techniques simultaneously with tenure choice.
37 Otsuka, K., Chuma, H., and Hayami, Y., "Land and Labor Contracts in Agrarian Economies: Theories and Facts", Journal of Economic Literature XXX, No. 4 (December 1992), p. 1974.
38 Otsuka, et al., op. cit., p. 1975.
39 ibid., p. 1977.
40 From this they draw the following conclusion:
Where stipulated contract terms are difficult for landowning principals to enforce and landless tillers are risk neutral, fixed rent contract will be chosen, whereas share contracts will be chosen when tillers are risk averse. ...
Where the tiller's work effort is perfectly enforceable, optimum contracts are, in general, indeterminate. ...
Significant inefficiency of share tenure is not common in areas where both share and fixed-rent contracts are available options: inefficiency tends to arise where contract choice is institutionally restricted. ibid., p. 2012-2013. [italics theirs]
41 Bardhan, P.K., Land, Labor, and Rural Poverty. Delhi: Oxford University Press, 1984, pp. 96-97.
42 Allen, D., and Lueck, D., "Contract Choice in Modern Agriculture: Cash Rent Versus Cropshare", Journal of Law and Economics XXXV, No. 2 (October 1992), p. 399.
43 Examples given by Allen and Lueck include not planting crops in the "proper" rotation, overusing chemicals and fertilisers that erode the soil, tilling in a way that increases output but reduces the moisture content of the soil, ibid., p. 401. This is something akin to Barzel's "free attributes".
44 this takes the form of devising ways of underreporting the quality and quantity of the harvest to the landowner. examples would be the farmer keeping the best hay or the wheat with the fewest weeds for himself, ibid., p. 402.
45 ibid., pp. 408-410. In a cash-rent contract, the farmer has the incentive to overuse the unpriced attributes of the land.