Sharecropping, Land Exploitation and Land Improving Investments Tridip Ray ∗ This version: June 2004 Abstract This paper analyzes the tenancy problem in a dynamic set-up and addresses two long-standing issues of inefficiency and lack of investment. It considers the problems that the tenant, with a shorter-term interest in the farm than the landlord, might overexploit the land to maximize immediate returns even at the cost of future dam- ages, and might under-supply long-run productivity improving investments in land. The paper shows that the efficient (first-best) levels of input use and investment can be achieved (both in the steady state and in transition) by a suitable share contract which by dampening incentives to maximize current returns addresses the land exploitation problem, and by an appropriate cost allocation rule which can address the investment problem. Key Words: Share contract, Land exploitation, Land quality dynamics, Alloca- tion rule, Accounting income. JEL Classification: D23, D80, O12, Q15. ∗ Department of Economics, Hong Kong University of Science & Technology, Clear Water Bay, Kowloon, Hong Kong. Tel: (852)2358-7625, Fax: (852)2358-2084, E-Mail:
[email protected]. An earlier draft of this paper comprised a chapter of my doctoral dissertation at Cornell University, and I am in- debted to Tapan Mitra, Kaushik Basu and David Easley for their advice and support throughout the work. Thanks are also due to Maitreesh Ghatak, Benjamin Hermalin, Hodaka Morita, Ted O’Donoghue, Debraj Ray, Gerhard Sorger, Susheng Wang and the seminar participants at Cornell, Hong Kong Univer- sity of Science & Technology, University of North Carolina at Chapel Hill, the Midwest Economic Theory Meetings (Michigan, Ann Arbor) and the Northeast Universities Development Consortium Conference (Yale) for helpful comments and discussions.