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Incomplete contracts and investment : a study of land tenancy in Pakistan

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Author Info
Jacoby, Hanan G.
Mansuri, Ghazala

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Abstract

When contracts are incomplete, relationship-specific investments may be underprovided due to the threat of opportunistic expropriation or holdup. The authors find evidence of such underinvestment on tenanted land in rural Pakistan. Using data from households cultivating multiple plots under different tenure arrangements, they show that land-specific investment is lower on leased plots. This result is robust to the possible effects of asymmetric information in the leasing market. Greater tenure security also increases land-specific investment on leased plots. Moreover, variation in tenure security appears to be driven largely by heterogeneity across landlords, suggesting that reputation may be important in mitigating the holdup problem.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3826.

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Date of creation: 01 Feb 2006
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Handle: RePEc:wbk:wbrwps:3826

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Related research
Keywords: Investment and Investment Climate; Municipal Housing and Land; Contract Law; Economic Theory&Research; Real Estate Development;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
  2. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law & Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
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  4. 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. [Downloadable!] (restricted)
  5. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December. [Downloadable!] (restricted)
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  6. Basu, Kaushik, 1992. "Limited liability and the existence of share tenancy," Journal of Development Economics, Elsevier, vol. 38(1), pages 203-220, January. [Downloadable!] (restricted)
  7. Laffont, Jean-Jacques & Matoussi, Mohamed Salah, 1995. "Moral Hazard, Financial Constraints and Sharecropping in El Oulja," Review of Economic Studies, Blackwell Publishing, vol. 62(3), pages 381-99, July. [Downloadable!] (restricted)
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  8. Yeon-Koo Che & Donald B. Hausch, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March. [Downloadable!] (restricted)
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  11. Andrews, Donald W K, 1989. "Power in Econometric Applications," Econometrica, Econometric Society, vol. 57(5), pages 1059-90, September. [Downloadable!] (restricted)
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  12. Honore, Bo E, 1992. "Trimmed LAD and Least Squares Estimation of Truncated and Censored Regression Models with Fixed Effects," Econometrica, Econometric Society, vol. 60(3), pages 533-65, May. [Downloadable!] (restricted)
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  15. North, Douglass C, 1991. "Institutions," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 97-112, Winter. [Downloadable!] (restricted)
  16. Allen, Douglas & Lueck, Dean, 1992. "Contract Choice in Modern Agriculture: Cash Rent versus Cropshare," Journal of Law & Economics, University of Chicago Press, vol. 35(2), pages 397-426, October.
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  18. Hanan G. Jacoby & Guo Li & Scott Rozelle, 2002. "Hazards of Expropriation: Tenure Insecurity and Investment in Rural China," American Economic Review, American Economic Association, vol. 92(5), pages 1420-1447, December. [Downloadable!]
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  19. Joskow, Paul L, 1987. "Contract Duration and Relationship-Specific Investments: Empirical Evidence from Coal Markets," American Economic Review, American Economic Association, vol. 77(1), pages 168-85, March. [Downloadable!] (restricted)
  20. Pender, John L. & Fafchamps, Marcel, 2001. "Land lease markets and agricultural efficiency: theory and evidence from Ethiopia," EPTD discussion papers 81, International Food Policy Research Institute (IFPRI). [Downloadable!]
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  21. Jovanovic, Boyan, 1979. "Firm-specific Capital and Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1246-60, December. [Downloadable!] (restricted)
  22. Charles Wilson, 1980. "The Nature of Equilibrium in Markets with Adverse Selection," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 108-130, Spring. [Downloadable!] (restricted)
  23. 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. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Holden, Stein & Bezabih, Mintewab, 2006. "Tenure Insecurity, Transaction Costs in the Land Lease Market and their Implications for Gendered Productivity Differentials," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25273, International Association of Agricultural Economists. [Downloadable!]
  2. James Roumasset, 2004. "Rural Institutions, Agricultural Development, and Pro-poor Economic Growth," Asian Journal of Agriculture and Development, Southeast Asian Regional Center for Graduate Study and Research in Agriculture, vol. 1(1), pages 61-82, June. [Downloadable!]
  3. Luis H. B. Braido, 2003. "Insurance and Incentives in Sharecropping," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  4. Gine, Xavier, 2005. "Cultivate or rent out ? Land security in rural Thailand," Policy Research Working Paper Series 3734, The World Bank. [Downloadable!]
  5. Luis H.B. Braido, 2005. "Risk and Insurance in Sharecropping," Risk and Insurance 0508002, EconWPA. [Downloadable!]
  6. Luis H.B. Braido, 2005. "Evidence on the Incentive Properties of Share Contracts," Development and Comp Systems 0508013, EconWPA. [Downloadable!]
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