Share Tenancy Contracts

To some, sharecropping carries connotations of exploitation, but in fact it is the predominant form of land rental in developing countries. If some key features of reality are assumed away -lack of uncertainty, perfect access to credit and insurance for the rural poor - it has been demonstrated theoretically that sharecropping always is inefficient - it always results in lower output, and lower labor input on the land, than pure cash rental contracts. However, when the analysis is made more realistic, 'with risk aversion and uncertainty, a share contract provides the possibility of partly insuring the tenant against fluctuations in output', and 'a limit on the working capital available to the tenant (or to landlord and tenant) because of imperfection in the credit market, can lead to the adoption of a share contract as the optimal solution to the bargaining problem [between landlord and tenant]'.178 Empirical tests have been made regarding the motivation for sharecropping contracts. Statistical tests performed on a sample of Tunisian farmers indicated that the credit constraint, rather than risk aversion, was the major factor underlying the choice of a share tenancy contract.179

Research on land rental markets in Ethiopia found that the negative efficiency effect of share tenancy is small and that rental markets as a whole improve the efficiency with which productive resources are allocated in agriculture:

Our research indicates that land rental markets have two opposing effects on agricultural efficiency: a positive land reallocation effect and a negative incentive effect. The positive reallocation effect results from better matching between land, labor and oxen power. The negative effect arises from the standard inefficiency argument according to which sharecropping reduces labor effort. Of the two effects, the first effect is by far the largest. Although we find evidence of a negative incentive effect for share-cropping, the magnitude of the efficiency loss is quite small and the effect on output and profit is negligible. On the whole, land rental markets in present-day rural Ethiopia perform a beneficial function and should not be discouraged.180

In sharecropping (share tenancy) systems, it is not necessary to make policy interventions to avoid the danger of rental rates getting out of date, since the payment is a share of the output. Binswanger et al. warn against attempting to regulate tenancy contracts: 'Historically, land reform that resulted in establishing owner-operated farms appears to have been a far more successful way of addressing the equity ques-tion'.181 On the other hand, in some cases of highly unequal distributions of landholdings and a preva

178. Reprinted from J. Behrman and T. N. Srinivasan (Eds), Handbook of Development Economics, Vol. 3B, H. P. Binswanger, K. Deininger and G. Feder, 'Power, distortions, revolt and reform in agricultural land relations', pp. 2713 and 2714, Copyright (1995), with permission from Elsevier.

180. Marcel Fafchamps, 'Land Rental Markets and Agricultural Efficiency in Ethiopia', mimeo, Department of Economics, Oxford University, Oxford, UK, August 23, 2000, p. 2.

181. Reprinted from J. Behrman and T. N. Srinivasan (Eds), Handbook in Development Economics, Vol. 3B, H. P. Binswanger, K. Deininger and G. Feder, 'Power, distortions, revolt and reform in agricultural land relations', p. 2716, Copyright (1995), with permission from Elsevier.

lence of sharecropping arrangements, it appears that legislating the division of the crop may improve both efficiency and equity. The results for an agricultural tenancy reform of this nature in the Indian state of West Bengal were summarized as follows:

A primary goal of the reform was to change the division of output between landlords and tenants in favor of tenants. As a result... the division of output on many tenancies changed from an even split to a 70-30 split in favor of tenants. By 1982 the reform had reached about half the state's sharecroppers, and over the next decade West Bengal achieved a breakthrough in agricultural growth. Banerjee and Ghatak (1996)182 estimate that more than a third of West Bengal's growth in agricultural production during 1981-92 was due to the tenancy reform. Thus the land tenancy reform not only redistributed income to the poor, it also changed the incentives of the poor to be productive by changing the tenancy contracts under which they supplied labor. In this way, redistribution substantially increased the income generated by the poor.183

Share tenancy is increasingly recognized as a useful system for access to land, in part because landowners often are a source of credit for the sharecroppers. This kind of contract also reduces risk to the landowner, in the face of possibilities of crop failure, vis-à-vis the option of paying wage labor. In summary:

Sharecrop tenancy seems to offer a package of incentives, insurance and interlinkage to other markets which is often best for both parties when compared to the relevant alternatives. . .. This observation is consistent with the conclusion that cultivation under share tenancy is not less efficient or less productive than other forms of tenancy.. . . We now have an abundance of research which demonstrates, both in theory and practice, that while a particular form of tenancy may not be efficient in an economically perfect world, in many instances the type of contract which prevails is optimal in the real world.184

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