Rationale for paternalism: “Semi-feudalistic” tenancy contracts in imperial Japan

Risk sharing in the informal/traditional sector, such as that through tenancy contracts, plays a critical role in the early development stages, but it becomes destabilized at some point in history. We build a two-sector contract model in which landlords reduce the weather risk incurred by tenant farmers by mobilizing tenant farmers’ unpaid work for the improvement and maintenance of infrastructure at the expense of tenant farmers’ farming efforts. We first confirm that social welfare decreases with the risk faced by society. However, we next find that the landlord’s surplus increases with risk under a certain risk threshold, but the relationship reverses beyond the threshold. Thus, informal security is not feasible against a catastrophic shock, and the state must insure society against such risk. The quasi-concave characteristics of the optimal contract help explain the rise and fall of Japanese landlordism from the late nineteenth century to the early twentieth century and provide implications for current developing economies.