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On the Structure of Tenancy Contracts: Theory and Evidence from 19th Century Rural Sicily

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  • Bandiera, Oriana

Abstract

In a world with asymmetric information, contractual terms are an important incentive device. This Paper studies the effect of crop characteristics on the choice between short-term and long-term tenancy contracts and on the choice between sharecropping and fixed-rent contracts when the production process depends on two non-contractibles: effort devoted to current production and effort devoted to plant and soil maintenance. Long-term contracts are effective in providing incentives for non-contractible maintenance investment. Since, however, incentive provision is costly, long-term contracts will be employed only when, due to the characteristics of the crop, maintenance benefits are high, or when, due to the characteristics of the tenant, the cost of providing incentives is low. The predictions of the theory are tested on a unique data set containing 705 tenancy contracts signed between 1870 and 1880 in the province of Syracuse (Sicily). The empirical evidence shows that, indeed, long-term contracts were used if the crops grown had higher maintenance needs. Other comparative static results are derived and tested empirically.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3032.

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Date of creation: Oct 2001
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Handle: RePEc:cpr:ceprdp:3032

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Keywords: contract duration; rural contracts; tenancy;

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Cited by:
  1. Oriana Bandiera, 2002. "Land distribution, incentives and the choice of production techniques in Nicaragua," LSE Research Online Documents on Economics 3545, London School of Economics and Political Science, LSE Library.
  2. Hooper, Louise, 2008. "Paying for performance: Uncertainty, asymmetric information and the payment model," Research in Transportation Economics, Elsevier, vol. 22(1), pages 157-163, January.

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