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Contract Duration and Investment Incentives: Evidence from Land Tenancy Agreements

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  • Oriana Bandiera

Abstract

This paper analyzes the empirical determinants of contract length, a key and yet neglected dimension of contractual structure. I estimate contract length and contract type jointly using original data on tenancy agreements signed between 1870 and 1880 in the district of Siracusa, Italy. The findings indicate that the choice of contract length is driven by the need to provide incentives for nonobservable investment, taking into account transaction costs and imperfections in the credit markets that make incentive provision costly. The results also illustrate that because both length and the compensation scheme are used to provide incentives within the same contract, joint analysis is important for a correct interpretation of the evidence. (JEL: D82, O12, Q15) (c) 2007 by the European Economic Association.

Suggested Citation

  • Oriana Bandiera, 2007. "Contract Duration and Investment Incentives: Evidence from Land Tenancy Agreements," Journal of the European Economic Association, MIT Press, vol. 5(5), pages 953-986, September.
  • Handle: RePEc:tpr:jeurec:v:5:y:2007:i:5:p:953-986
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    Citations

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    Cited by:

    1. Hsuan-Yu Lin & Chih-Hai Yang, 2016. "Uncertainty, specific investment, and contract duration: evidence from the MLB player market," Empirical Economics, Springer, vol. 50(3), pages 1009-1028, May.
    2. Dubois, Pierre & Vukina, Tomislav, 2009. "Incentives to Invest in Short-term vs. Long-term Contracts: Evidence from a Natural Experiment," IDEI Working Papers 590, Institut d'Économie Industrielle (IDEI), Toulouse, revised Dec 2009.
    3. 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.
    4. Nakajima, Shinsaku, 2010. "Tenancy Contract Choice and Land Improvement Investment for Upland Farming," Japanese Journal of Rural Economics, Agricultural Economics Society of Japan (AESJ), vol. 12.
    5. Panu Poutvaara & Tuomas Takalo & Andreas Wagener, 2017. "The Optimal Duration of Contracts," CESifo Working Paper Series 6808, CESifo Group Munich.
    6. Elisabetta Iossa & Patrick Rey, 2014. "Building Reputation For Contract Renewal: Implications For Performance Dynamics And Contract Duration," Journal of the European Economic Association, European Economic Association, vol. 12(3), pages 549-574, June.
    7. repec:eee:indorg:v:57:y:2018:i:c:p:35-83 is not listed on IDEAS
    8. Awudu Abdulai & Renan Goetz, 2014. "Time-Related Characteristics of Tenancy Contracts and Investment in Soil Conservation Practices," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 59(1), pages 87-109, September.
    9. Matthew Ellman, 2006. "The optimal length of contracts with application to outsourcing," Economics Working Papers 965, Department of Economics and Business, Universitat Pompeu Fabra.
    10. Dubois Pierre & Vukina Tomislav, 2016. "Incentives to Invest in Short-Term vs Long-Term Contracts: Theory and Evidence," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(3), pages 1239-1272, September.
    11. Feuerriegel, Stefan & Neumann, Dirk, 2016. "Integration scenarios of Demand Response into electricity markets: Load shifting, financial savings and policy implications," Energy Policy, Elsevier, vol. 96(C), pages 231-240.
    12. Conlin, Michael & Orsini, Joe & Tang, Meng-Chi, 2013. "The effect of an agent’s expertise on National Football League contract structure," Economics Letters, Elsevier, vol. 121(2), pages 275-281.
    13. Holden, Helge & Holden, Lars & Holden, Steinar, 2010. "Contract adjustment under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 657-680, April.
    14. Yutaka Arimoto & Tetsuji Okazaki & Masaki Nakabayashi, 2005. "Risk, Transaction Costs, and Geographic Distribution of Share Tenancy: A Case of Pre-War Japan," CARF F-Series CARF-F-024, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    15. Maija Halonen-Akatwijuka & Oliver Hart, 2015. "Short-term, Long-term, and Continuing Contracts," NBER Working Papers 21005, National Bureau of Economic Research, Inc.
    16. Luis H.B. Braido, 2005. "Risk and Insurance in Sharecropping," Risk and Insurance 0508002, EconWPA.
    17. Maija Halonen-Akatwijuka & Oliver Hart, 2015. "Continuing Contracts," Bristol Economics Discussion Papers 15/665, Department of Economics, University of Bristol, UK, revised 12 Oct 2016.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment

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