Sharecropping

Sharecropping

THEORIES OF SHARECROPPING: THE QUASI MONOPOLY OF ECONOMICS

EMPIRICAL EVIDENCE ON SHARECROPPING

BIBLIOGRAPHY

A sharecropping arrangement is an agrarian contract between a landlord and a tenant in which the tenant pays a fraction of the crop to the landlord in exchange for the right to exploit the landlord’s plot of land. In addition to the crop rent, there may or may not be a fixed component to the contract in the form of a side payment either from the landlord to the tenant (a wage) or from the tenant to the landlord (a fixed rent). As a result, sharecropping (or share tenancy) is an alternative to (1) a wage contract, in which the landlord pays the tenant a wage but gets to keep all of the crop; and (2) a fixed rent contract, in which the tenant pays the landlord a fixed rent (either in cash or in kind) but gets to keep all of the crop. Sharecropping should therefore not be confused with a crop fixed rent contract, in which the tenant exploits the land in exchange for a fixed amount of crop per unit of land paid as rent (e.g., 1 ton of grain per hectare).

Terence J. Byres in his introduction to a collection of essays and case studies on sharecropping (1983) provides a historical perspective on share tenancy and recounts how the institution is mentioned in historical documents from ancient Greece (594-593 BCE); ancient China (722-481 BCE); ancient India (fourth century BCE); the Roman Empire (61-112 CE); western Europe, especially France, where the institution is referred to as métayage (ninth century CE); southern Europe, especially Italy, where the institution is referred to as mezzadria (ninth century CE); Russia, where the institution is referred to as polovnik, under the Mongol Empire (thirteenth and fourteenth centuries); and China and India during the twentieth century.

Sharecropping has long been reviled by social scientists—most notably by Marx-inspired economists such as Amit Bhaduri (1973) and Robert Pearce (1983), who perceived it as a mechanism by which capital (i.e., landed individuals or households) exploits labor (i.e., landless individuals or households)—but also by most economists up to Joseph E. Stiglitz (1974), as related by Alexander F. Robertson (1980). Although the Marxist critique of share tenancy may have been true during some historical periods and in some regions of the world (e.g., in the postbellum southern United States; see Reid 1973), it does not explain the persistence of sharecropping contracts that both parties enter into voluntarily, in places as diverse as the United States (Young and Burke 2001), Brazil (Stolcke and Hall 1983), Ethiopia (Pender and Fafchamps 2006), Madagascar (Bellemare 2006), India (Pandey 2004), Pakistan (Jacoby and Mansuri 2006), and so on.

THEORIES OF SHARECROPPING: THE QUASI MONOPOLY OF ECONOMICS

The study of sharecropping by social scientists has been almost the exclusive preserve of economists, and it dates back to Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations (1776, 1976), which viewed métayage (Smith used the French term for share-cropping, since share tenancy was still unheard of in England) as an inefficient contract between slavery and the English (i.e., fixed rent) system. Alfred Marshall, in the eighth and last edition of his Principles of Economics (1920), was the first social scientist to apply a rigorous analytical framework to the study of sharecropping, allowing him to identify the moral hazard problem associated with share tenancy. Assuming that supervision of the tenant by the landlord is prohibitively costly, the tenant will provide labor only up to the point where the value of his marginal product of labor equals the opportunity cost from entering the contract (i.e., the wage the tenant would derive from alternative employment). But then, because the tenant receives only a fraction of the value of the marginal product of labor, and given that the marginal product of labor is assumed to be decreasing, the tenant will underprovide labor with respect to a fixed rent contract. In the years following the publication of the last edition of Principles of Economics, the moral hazard problem associated with sharecropping—that is, the underprovision of labor by the tenant due to the fact that the landlord cannot supervise labor—has thus come to be known as “Marshallian inefficiency.”

It was not until much later, in the 1960s, that Steven N. S. Cheung, then a graduate student at the University of Chicago, sought to reestablish the efficiency of share tenancy, although an effort had been made in that direction by D. Gale Johnson, who argued that tenants have every incentive to produce efficiently given the threat of eviction by the landlord in a repeated interaction setting (Johnson 1950). By assuming that the landlord can cost-lessly enforce the tenant’s level of effort, Cheung showed that sharecropping can be as efficient as a fixed rent contract in a static framework (1968).

Two schools of thought were thus born. On the one hand, the Marshallian view argued that sharecropping was inefficient because it assumed that enforcing the landlord’s preferred level of effort was prohibitively costly. On the other hand, the Cheungian (or “transactions costs”) view argued that sharecropping was efficient because it assumed that the landlord could costlessly enforce her preferred level of effort.

Taking a deliberately Marshallian view, Stiglitz was the first to fully formalize the institution of sharecropping using the tools of microeconomic theory (1974). In a paper that presents and solves one of the first complete principal-agent models in economics, Stiglitz asked why sharecropping in developing countries was perceived as an inefficient (and often irrational) arrangement when the same type of contract did not raise any questions when observed under the form of commission sales in industrialized countries. Stiglitz showed that when the absentee landlord is risk-neutral and the tenant is risk-averse, share cropping provides a useful trade-off between incentives and risk-sharing. In this case, a wage contract provides the weakest incentives to the tenant, who is also fully insured against production risk, whereas a fixed rent contract provides the strongest incentives to the tenant, who is also exposed to all the production risk. By trading off the tenant’s comparative advantage in labor supervision with the landlord’s comparative advantage in risk-bearing, a share-cropping contract remains the optimal choice among the set of inefficient contracts, i.e., it is second-best, following the terminology of contract theory. Stiglitz’s work, which contributed to the birth of the so-called information revolution in economics along with that of George Akerlof (1970) and A. Michael Spence (1973), also reestablished the rationality of sharecropping.

The theory of share tenancy put forth by Stiglitz provided the canonical model of sharecropping, but it has been refined in many ways. David M. G. Newbery incorporated a second type of uncertainty, namely uncertainty over the tenant’s wage from alternative employment, in the framework (1977). Mukesh Eswaran and Ashok Kotwal in 1985 considered the contracting problem under two-sided moral hazard—that is, moral hazard in the provision of managerial ability by the landlord and moral hazard in the provision of labor by the tenant—and showed that when each party is highly inefficient in providing the other party’s inputs (i.e., when the tenant is highly inefficient at providing managerial ability and when the landlord is highly inefficient at providing labor supervision), sharecropping emerges as the optimal contract. Clive Bell and Pinhas Zusman, instead of adopting the principal-agent framework, used the tools of cooperative game theory to study sharecropping (1976). William Hallagan abstracted from moral hazard considerations and instead chose to introduce adverse selection into the model to explain selection by the tenants into different contracts (1978). Douglas Allen and Dean Lueck took into account the fact that, in certain parts of the world, the landlord and the tenant share the cost of inputs, and that when the crop share is set equal to the cost share, sharecropping is again an efficient arrangement (1992, 1993). Maitreesh Ghatak and Priyanka Pandey showed that in the presence of limited liability, if the tenant can choose between agricultural techniques that differ in their levels of expected yield and variance, the landlord may choose a sharecropping contract in order to curb the tenant’s risk-taking behavior (2000). Marc F. Bellemare developed theoretical explanations to account for the emergence of reverse share tenancy (i.e., sharecropping between a poor, risk-averse landlord and a richer, risk-neutral tenant), a contract that remains a theoretical impossibility under the canonical Stiglitzian theory of share tenancy (2006). This list of works is nonexhaustive, given that sharecropping is one of the most studied problems in economics and in the social sciences.

EMPIRICAL EVIDENCE ON SHARECROPPING

Empirically, social scientists have sought to answer two major questions regarding sharecropping: (1) Do incentives matter in land tenancy agreements—that is, are tenants less productive under share tenancy than under fixed rent, or is there Marshallian inefficiency?; and (2) Do the contract shapes observed in the data correspond to theoretical predictions? As in much of the applied literature on contracts (Prendergast 1999), the second question has received much less attention, mostly because of lack of data. Most empirical researchers asking the first question have found at least partial support for the hypothesis of Marshallian inefficiency (Bell 1977 and Shaban 1987 in India; Laffont and Matoussi 1995 and Ai, Arcand, and Éthier 1996 in Tunisia; Jacoby and Mansuri 2006 in Pakistan). As regards the second question, Daniel Ackerberg and Maristella Botticini found that risk-sharing concerns indeed do drive contract choice once the possibility that landlords and tenants match endogenously is taken into account in a data set of land tenancy contracts in early Renaissance Tuscany (2002); Pierre Dubois found that fertility considerations make landlords more likely to choose a sharecropping contract in an effort to curb tenants’ incentives to overuse the land and deplete soil fertility in a dataset of land tenancy contracts in a rural area of the Philippines (2002); and Bellemare found that asset risk (i.e., the possibility of losing their claim to the land) makes landlords more likely to choose sharecropping over fixed rent in a dataset of land tenancy contracts in Madagascar (2006).

BIBLIOGRAPHY

Ackerberg, Daniel A., and Maristella Botticini. 2002. Endogenous Matching and the Empirical Determinants of Contract Form. Journal of Political Economy 110: 564-591.

Ai, Chunrong, Jean-Louis Arcand, and François Éthier. 1996. Moral Hazard and Marshallian Inefficiency: Evidence from Tunisia. Working Paper, Université de Montréal.

Akerlof, George. 1970. The Market for Lemons. Quarterly Journal of Economics 89: 488-500.

Allen, Douglas, and Dean Lueck. 1992. Contract Choice in Modern Agriculture: Cash Rent Versus Cropshare. Journal of Law and Economics 35: 397-426.

Allen, Douglas, and Dean Lueck. 1993. Transaction Costs and the Design of Cropshare Contracts. RAND Journal of Economics 24: 78-100.

Bell, Clive. 1977. Alternative Theories of Sharecropping: Some Tests Using Evidence from Northeast India. Journal of Development Studies 13: 317-346.

Bell, Clive, and Pinhas Zusman. 1976. A Bargaining-Theoretic Approach to Cropsharing Contracts. American Economic Review 66: 578-588.

Bellemare, Marc F. 2006. Three Essays on Agrarian Contracts. PhD. diss., Cornell University.

Bhaduri, Amit. 1973. A Study in Agricultural Backwardness Under Semi-Feudalism. Economic Journal 83: 120-137.

Breman, Jan. 1974. Patronage and Exploitation. Berkeley: University of California Press.

Byres, Terence J. 1983. Sharecropping and Sharecroppers. London: Frank Cass.

Cheung, Steven N. S. 1968. Private Property Rights and Sharecropping. Journal of Political Economy 76: 1107-1122.

Dubois, Pierre. 2002. Moral Hazard, Land Fertility, and Sharecropping in a Rural Area of the Philippines. Journal of Development Economics 68: 35-64.

Eswaran, Mukesh, and Ashok Kotwal. 1985. A Theory of Contractual Structure in Agriculture. American Economic Review 75: 352-367.

Ghatak, Maitreesh, and Priyanka Pandey. 2000. Contract Choice in Agriculture with Joint Moral Hazard in Effort and Risk. Journal of Development Economics 63: 303-326.

Hallagan, William. 1978. Self-Selection by Contractual Choice and the Theory of Sharecropping. Bell Journal of Economics 9: 344-354.

Jacoby, Hanan G., and Ghazala Mansuri. 2006. Incentives, Supervision, and Sharecropper Productivity. Development Economics Research Group Working Paper. Washington, DC: World Bank.

Johnson, D. Gale. 1950. Resource Allocation under Share Contracts. Journal of Political Economy 58: 111-123.

Laffont, Jean-Jacques, and Mohammed S. Matoussi. 1995. Moral Hazard, Financial Constraints, and Sharecropping in El Oulja. Review of Economic Studies 62: 381-399.

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Newbery, David M. G. 1977. Risk-Sharing, Sharecropping, and Uncertain Labor Markets. Review of Economic Studies 44:585-594.

Pandey, Priyanka. 2004. Effects of Technology on Incentive Design of Share Contracts. American Economic Review 94:1152-1168.

Pearce, Robert. 1983. Sharecropping: Towards a Marxist View. In Sharecropping and Sharecroppers, ed. Terence J. Byres, 48-52. London: Frank Cass.

Pender, John, and Marcel Fafchamps. 2006. Land Lease Markets and Agricultural Efficiency in Ethiopia. Journal of African Economics 15: 251-284.

Prendergast, Canice. 1999. The Provision of Incentives in Firms. Journal of Economic Literature 37: 7-63.

Reid, Joseph D. 1973. Sharecropping as an Understandable Market Response: The Post-Bellum South. Journal of Economic History 33: 106-130.

Robertson, Alexander F. 1980. On Sharecropping. Man 15:411-429.

Shaban, Radwan A. 1987. Testing between Competing Models of Sharecropping. Journal of Political Economy 95: 893-920.

Smith, Adam. [1776] 1976. An Inquiry into the Nature and Causes of the Wealth of Nations. Chicago: University of Chicago Press.

Spence, A. Michael. 1973. Job Market Signaling. Quarterly Journal of Economics 87: 355-374.

Stiglitz, Joseph E. 1974. Incentives and Risk-Sharing in Sharecropping. Review of Economic Studies 41: 219-255.

Stolcke, Verena, and Michael M. Hall. 1983. The Introduction of Free Labor on São Paulo Coffee Plantations. In Sharecropping and Sharecroppers, ed. Terence J. Byres, 170-200. London: Frank Cass.

Young, H. Peyton, and Mary A. Burke. 2001. Competition and Custom in Economic Contracts: A Case Study of Illinois Agriculture. American Economic Review 91: 559-573.

Marc F. Bellemare