RISK-COPING ARRANGEMENTS IN AGRICULTURE

Risk in rural areas is high due to multidimensional reasons:

• Drastic changes in weather conditions

• High incidence of infectious diseases

• Credit market imperfections

How do poor peasants cope with risk in rural areas?

Main focus in today’s class: “sharecropping”

Sharecropping:

A contract where output is divided between a landlord and a tenant according to a pre-determined rule (i.e., 50 – 50)

Marshallian inefficiency

A. Marshall argued that relative to fixed – rent contracts sharecropping is “inefficient”

Why?

Incentives:

Unlike fixed – rent contracts where the tenant retains 100% of the additional output produced, under sharecropping, part of the output goes to the landlord and therefore tenants will undersupply effort

Labor

OutputCosts

Production, cost, and economic surplus

Labor

OutputCosts

Sharecropping

Labor

OutputCosts

Fixed rent

So, why is sharecropping so widespread?

Tenant is risk – averse

Other arguments:

a) Risk – neutral tenants and landlords supply effortb) Input costs are shared between landlords and tenantsc) Limited liabilityd) Screeninge) Limited liability and non-verifiable effort

→WDR (2005), and DR Chapter 5: History, Expectations & Development. Please consult the updated version of your syllabus (course web site).