Working Paper: CEPR ID: DP3032
Authors: Oriana Bandiera
Abstract: In a world with asymmetric information, contractual terms are an important incentive device. This Paper studies the effect of crop characteristics on the choice between short-term and long-term tenancy contracts and on the choice between sharecropping and fixed-rent contracts when the production process depends on two non-contractibles: effort devoted to current production and effort devoted to plant and soil maintenance. Long-term contracts are effective in providing incentives for non-contractible maintenance investment. Since, however, incentive provision is costly, long-term contracts will be employed only when, due to the characteristics of the crop, maintenance benefits are high, or when, due to the characteristics of the tenant, the cost of providing incentives is low. The predictions of the theory are tested on a unique data set containing 705 tenancy contracts signed between 1870 and 1880 in the province of Syracuse (Sicily). The empirical evidence shows that, indeed, long-term contracts were used if the crops grown had higher maintenance needs. Other comparative static results are derived and tested empirically.
Keywords: contract duration; rural contracts; tenancy
JEL Codes: D82; O12; O17; Q15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high maintenance needs crops (Q16) | long-term contracts (L14) |
| tenant's wealth (D14) | long-term contracts (L14) |
| outside opportunities (O36) | long-term contracts (L14) |
| tenant's wealth (D14) | fixed-rent contracts (R21) |
| low marginal product of effort (D24) | fixed-rent contracts (R21) |
| maintenance-intensive crops (Q16) | long-term contracts (L14) |
| less sensitive maintenance crops (Q16) | fixed-rent contracts (R21) |