The Choice of Land Tenure Contracts in the Presence of Transaction Costs in Rice Farming in West Java, Indonesia

This study assessed the preference for and efficiency of land tenure contract arrangements in rice farming in West Java, Indonesia. Specifically, it examined the transaction costs associated with land tenure contracts, the land tenure contract preference, the efficiency of land tenure contracts, and the policy agenda to address the problems of land tenure efficiency. Three types of land tenure contracts were considered: sharecropping, fixed rental and mortgage. Farm plot data were used to econometrically investigate whether transaction cost had an effect on the choice of land tenure contracts and on the efficiency of land tenure contracts. The transaction cost coefficient of 0.097 (significant of 1% level) in the choice of land tenure indicates that as the value of transaction cost increases, the landlord will most likely choose sharecropping. However, if the transaction cost decreases, it is more likely that the landlord will choose mortgage or fixed rental. These findings show that contract choice of landlord’s is influenced by the transaction cost. The results show that sharecropping is the more efficient land tenure arrangement in West Java, Indonesia. Thus it does not support the Marshallian view of sharecropping as an inefficient land tenure arrangement. Sharecropping in the study area is benefiting both the landlord and the tenant farmers. Transaction cost dismisses as labor monitoring is needed to the barest minimum and higher marginal product is achieved. Adoption of sharecropping in West Java like support the government program of consolidating rice farm to attain scale in economics’ and utilization more efficiently farm labor. The government needs to facilitate the dissemination of information on land transaction.