Download Ownership and Tenancy

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,
Cos t
Production Function, g(L)
Labour
MP
Labour
Figure: Production
Huw Lloyd-Ellis ()
Econ 239
Fall 2010
6 / 23
Output,
Cos t
Produc tion Func tion, g(L)
Cos t Function, C(L)
Labour
MC
MP
Labour
Figure: Production, Cost
Huw Lloyd-Ellis ()
Econ 239
Fall 2010
7 / 23
Output,
Cos t
Production Function, g(L)
L**
Labour
MC
MP
L**
Labour
Figure: Production, Cost and Economic Surplus
Huw Lloyd-Ellis ()
Econ 239
Fall 2010
8 / 23
Linear compensation schemes:
I = (1
Tenant’s income :
α )Y
F
C (L)
R = αY + 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,
Cos t
g(L)
(1-α)g(L)
C(L)
Labour
L**
L
MC
Efficiency Loss
MP
(1-α)MP
L
L**
Labour
Figure: Ine¢ ciency of Sharecropping
Huw Lloyd-Ellis ()
Econ 239
Fall 2010
11 / 23
Output,
Cos t
g(L)
g(L) - F
C(L)
L**
Labour
MC
MP
L**
Labour
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
g (L) x
with probability
with probability
1
2
1
2
,! average output:
Ȳ = 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
T otal Cost
of Ris k
Expos ure
MCR
Expos ure
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
Cos t
of Ris k
T enant
Landlord
α
Cos t
of Ris k
T otal Cost
0
α∗∗
1
α
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 −α1)MP
L1
Labour
MCR
1 −α
1 −α1
Figure: Too Little E¤ort
Huw Lloyd-Ellis ()
Econ 239
Fall 2010
20 / 23
MC
E
(1 −α2)MP
MP
Labour
L2
MCR
1 −α2
1 −α
Figure: Too Much Risk
Huw Lloyd-Ellis ()
Econ 239
Fall 2010
21 / 23
MC
A
E
B
(1 −α∗)MP
MP
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