IDEAS home Printed from https://ideas.repec.org/p/phs/dpaper/201606.html
   My bibliography  Save this paper

Why Fixed Rent Contracts are Less Prevalent: Weak Third Party Enforcement and Endogenous Principal Type

Author

Listed:
  • Raul V. Fabella

    (School of Economics, University of the Philippines Diliman
    National Academy of Science and Technology)

Abstract

We revisit the question of why fixed rent contracts are less prevalent than crop share contracts despite Marshallian inefficiency. We consider the case where the type of the principal is endogenous to contract provisions and reneging by the principal may pay due to weak third party enforcement (TPE). We imbed the quality of TPE into the participation constraint of the agent in an effort-in-advance P-A model. The governance regime explicitly involves interplay of three categories of the Northian enforcement, viz., first, second and third party enforcement. Weak and strong TPE are formally defined. We show that the general contract derived nests the usual textbook contract when TPE is strong; weak TPE on the other hand results in a strictly positive induced risk aversion which always exceeds the inherent risk aversion of the agent. This prevents the power of the contract to equal one even when the agent is risk-neutral, thus, rendering a fixed-rent contract sub-optimal.

Suggested Citation

  • Raul V. Fabella, 2016. "Why Fixed Rent Contracts are Less Prevalent: Weak Third Party Enforcement and Endogenous Principal Type," UP School of Economics Discussion Papers 201606, University of the Philippines School of Economics.
    • Handle: RePEc:phs:dpaper:201606
    as

    Download full text from publisher

    File URL: http://www.econ.upd.edu.ph/dp/index.php/dp/article/view/1493
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Thierry Post & Martijn J. van den Assem & Guido Baltussen & Richard H. Thaler, 2008. "Deal or No Deal? Decision Making under Risk in a Large-Payoff Game Show," American Economic Review, American Economic Association, vol. 98(1), pages 38-71, March.
    2. Masten, Scott E, 1988. "Minimum Bill Contracts: Theory and Policy," Journal of Industrial Economics, Wiley Blackwell, vol. 37(1), pages 85-97, September.
    3. Oliver Hart & John Moore, 2007. "Incomplete Contracts and Ownership: Some New thoughts," American Economic Review, American Economic Association, vol. 97(2), pages 182-186, May.
    4. Sen, Debapriya, 2011. "A theory of sharecropping: The role of price behavior and imperfect competition," Journal of Economic Behavior & Organization, Elsevier, vol. 80(1), pages 181-199.
    5. Klein, Benjamin, 1996. "Why Hold-Ups Occur: The Self-Enforcing Range of Contractual Relationships," Economic Inquiry, Western Economic Association International, vol. 34(3), pages 444-463, July.
    6. Jean-Jacques Laffont & Mohamed Salah Matoussi, 1995. "Moral Hazard, Financial Constraints and Sharecropping in El Oulja," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(3), pages 381-399.
    7. North, Douglass C. & Weingast, Barry R., 1989. "Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England," The Journal of Economic History, Cambridge University Press, vol. 49(4), pages 803-832, December.
    8. Luis H. B. Braido, 2003. "Insurance and Incentives in Sharecropping," CESifo Working Paper Series 1098, CESifo.
    9. Banerjee, Abhijit V. & Ghatak, Maitreesh, 2004. "Eviction threats and investment incentives," Journal of Development Economics, Elsevier, vol. 74(2), pages 469-488, August.
    10. Daniel A. Ackerberg & Maristella Botticini, 2002. "Endogenous Matching and the Empirical Determinants of Contract Form," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 564-591, June.
    11. Dubois, Pierre, 2002. "Moral hazard, land fertility and sharecropping in a rural area of the Philippines," Journal of Development Economics, Elsevier, vol. 68(1), pages 35-64, June.
    12. D. Gale Johnson, 1950. "Resource Allocation under Share Contracts," Journal of Political Economy, University of Chicago Press, vol. 58(2), pages 111-111.
    13. Joseph E. Stiglitz, 1974. "Incentives and Risk Sharing in Sharecropping," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(2), pages 219-255.
    14. James Roumasset & Marilou Uy, 1987. "Agency Costs and the Agricultural Firm," Land Economics, University of Wisconsin Press, vol. 63(3), pages 290-302.
    15. Eswaran, Mukesh & Kotwal, Ashok, 1985. "A Theory of Contractual Structure in Agriculture," American Economic Review, American Economic Association, vol. 75(3), pages 352-367, June.
    16. Luporini, Annalisa & Parigi, Bruno, 1996. "Multi-Task Sharecropping Contracts: The Italian Mezzadria," Economica, London School of Economics and Political Science, vol. 63(251), pages 445-457, August.
    17. Roumasset, J., 1995. "The nature of the agricultural firm," Journal of Economic Behavior & Organization, Elsevier, vol. 26(2), pages 161-177, March.
    18. Cheung, Steven N S, 1969. "Transaction Costs, Risk Aversion, and the Choice of Contractual Arrangements," Journal of Law and Economics, University of Chicago Press, vol. 12(1), pages 23-42, April.
    19. North, Douglass C, 1994. "Economic Performance through Time," American Economic Review, American Economic Association, vol. 84(3), pages 359-368, June.
    20. Eric Malin & David Martimort, 2002. "Transaction Costs and Contract Theory," Post-Print halshs-00440475, HAL.
    21. Williamson, Oliver E, 1983. "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, American Economic Association, vol. 73(4), pages 519-540, September.
    22. Ghatak, Maitreesh & Pandey, Priyanka, 2000. "Contract choice in agriculture with joint moral hazard in effort and risk," Journal of Development Economics, Elsevier, vol. 63(2), pages 303-326, December.
    23. Eric Malin & David Martimort, 2000. "Transaction Costs and Incentive Theory," Revue d'Économie Industrielle, Programme National Persée, vol. 92(1), pages 125-148.
    24. Jacoby, Hanan G. & Mansuri, Ghazala, 2006. "Incomplete contracts and investment : a study of land tenancy in Pakistan," Policy Research Working Paper Series 3826, The World Bank.
    25. Hoffman, Philip T., 1984. "The Economic Theory of Sharecropping in Early Modern France," The Journal of Economic History, Cambridge University Press, vol. 44(2), pages 309-319, June.
    26. repec:dau:papers:123456789/12331 is not listed on IDEAS
    27. Allen, Douglas & Lueck, Dean, 1992. "Contract Choice in Modern Agriculture: Cash Rent versus Cropshare," Journal of Law and Economics, University of Chicago Press, vol. 35(2), pages 397-426, October.
    28. Shaban, Radwan Ali, 1987. "Testing between Competing Models of Sharecropping," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 893-920, October.
    29. Allen, Douglas W & Lueck, Dean, 1999. "The Role of Risk in Contract Choice," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 15(3), pages 704-736, October.
    30. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    31. Muthoo, Abhinay, 1998. "Renegotiation-proof tenurial contracts as screening mechanisms," Journal of Development Economics, Elsevier, vol. 56(1), pages 1-26, June.
    32. Shetty, Sudhir, 1988. "Limited liability, wealth differences and tenancy contracts in agrarian economies," Journal of Development Economics, Elsevier, vol. 29(1), pages 1-22, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Luis H.B. Braido, 2005. "Risk and Insurance in Sharecropping," Risk and Insurance 0508002, University Library of Munich, Germany.
    2. Sen, Debapriya, 2011. "A theory of sharecropping: The role of price behavior and imperfect competition," Journal of Economic Behavior & Organization, Elsevier, vol. 80(1), pages 181-199.
    3. Oriana Bandiera, 1999. "On the Structure of Tenancy contracts: Theory and Evidence fron 19th Century Rural Sicily," STICERD - Development Economics Papers - From 2008 this series has been superseded by Economic Organisation and Public Policy Discussion Papers 19, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    4. Ackerberg, Daniel A. & Botticini, Maristella, 2000. "The Choice of Agrarian Contracts in Early Renaissance Tuscany: Risk Sharing, Moral Hazard, or Capital Market Imperfections?," Explorations in Economic History, Elsevier, vol. 37(3), pages 241-257, July.
    5. Luis H. B. Braido, 2008. "Evidence on the Incentive Properties of Share Contracts," Journal of Law and Economics, University of Chicago Press, vol. 51(2), pages 327-349, May.
    6. Mukhamedova, Nozilakhon & Pomfret, Richard, 2019. "Why does sharecropping survive? Agrarian institutions and contract choice in Kazakhstan and Uzbekistan," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 61(4), pages 576-597.
    7. Debapriya Sen, 2005. "Sharecropping, interlinkage, and price variation," Department of Economics Working Papers 05-10, Stony Brook University, Department of Economics.
    8. Nozilakhon Mukhamedova & Richard Pomfret, 2019. "Why Does Sharecropping Survive? Agrarian Institutions and Contract Choice in Kazakhstan and Uzbekistan," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 61(4), pages 576-597, December.
    9. Yutaka ARIMOTO & Tetsuji OKAZAKI & Masaki NAKABAYASHI, 2010. "Agrarian Land Tenancy In Prewar Japan: Contract Choice And Implications On Productivity," The Developing Economies, Institute of Developing Economies, vol. 48(3), pages 293-318, September.
    10. Pierre-André Chiappori & Bernard Salanié, 2002. "Testing Contract Theory : A Survey of Some Recent Work," Working Papers 2002-11, Center for Research in Economics and Statistics.
    11. Dubois, Pierre, 2002. "Moral hazard, land fertility and sharecropping in a rural area of the Philippines," Journal of Development Economics, Elsevier, vol. 68(1), pages 35-64, June.
    12. Konrad B Burchardi & Selim Gulesci & Benedetta Lerva & Munshi Sulaiman, 2019. "Moral Hazard: Experimental Evidence from Tenancy Contracts," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(1), pages 281-347.
    13. Jacoby, Hanan G. & Mansuri, Ghazala, 2009. "Incentives, supervision, and sharecropper productivity," Journal of Development Economics, Elsevier, vol. 88(2), pages 232-241, March.
    14. Mohamed Salah Matoussi & Neji Saidi, 2014. "Financial Constraints Risk Aversion and Sharecropping in Rainfed Agriculture: Application to North West Tunisia," Working Papers 880, Economic Research Forum, revised Nov 2014.
    15. Luis H. B. Braido, 2003. "Insurance and Incentives in Sharecropping," CESifo Working Paper Series 1098, CESifo.
    16. Jin, Songqing & Deininger, Klaus, 2009. "Land rental markets in the process of rural structural transformation: Productivity and equity impacts from China," Journal of Comparative Economics, Elsevier, vol. 37(4), pages 629-646, December.
    17. Ananish Chaudhuri, 1997. "A Dynamic Model of Contractual Choice in Tenancy," Departmental Working Papers 199711, Rutgers University, Department of Economics.
    18. Oriana Bandiera, 2002. "Land Distribution, Incentives and the Choice of Production Techniques in Nicaragua," STICERD - Development Economics Papers - From 2008 this series has been superseded by Economic Organisation and Public Policy Discussion Papers 34, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    19. Daniel A. Ackerberg & Maristella Botticini, 2002. "Endogenous Matching and the Empirical Determinants of Contract Form," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 564-591, June.
    20. Jiancai PI, 2013. "An organizational economics approach to the existence of sharecropping," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 59(11), pages 537-541.

    More about this item

    Keywords

    sharecropping; weak TPE; endogenous type; induced risk aversion;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:phs:dpaper:201606. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: RT Campos (email available below). General contact details of provider: https://edirc.repec.org/data/seupdph.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.