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Sharecropping in Theory and Practice: A Selective Review

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Understanding Development

Part of the book series: India Studies in Business and Economics ((ISBE))

Abstract

Sharecropping has remained a dominant agrarian institution around the world. There is a large, and growing, literature that has studied this institution from both theoretical and empirical points of view. This chapter presents a review of the literature on sharecropping. Complementing earlier reviews (e.g., Quibria and Rashid, World Dev 12:103–114, 1984; Otsuka and Hayami, Econ Dev Cult Change 37:31–68, 1988; Singh 1989), our approach is purposely selective. After presenting some aspects of the risk-based theories of sharecropping, we discuss certain alternative theories given in the more recent literature. We also comment on some implications of this institution specific to agrarian economies in transition.

This article is dedicated to the memory of my father Biswadeb Sen, who remains a source of inspiration.

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Notes

  1. 1.

    In the screening models, the tenant’s skill is his private information and he signals his skill to the landlord through his choice of contracts. These models predict a separating contractual structure: low-skilled tenants choose fixed wages, high-skilled ones choose fixed rentals and tenants with intermediate skills choose share contracts. However, Bardhan and Udry (1999, p. 63) cast some doubt on the plausibility of screening models in a close-knit village: “It is doubtful how important this role of tenancy contract as a screening device is in the small closed world of a traditional village, where the landlord usually has a fairly good idea of the ability of the different members of the village work force.”

  2. 2.

    For theoretical and empirical aspects of sharecropping and related issues in an agrarian economy, see also Johnson (1950), Cheung (1969), Bardhan and Srinivasan (1971), Bliss and Stern (1982), Byres (1983), Bardhan (1984, 1989, 2005a), Binswanger and Rosenzweig (1984), Otsuka et al. (1992), Hayami and Otsuka (1993), Sharma and Drèze (1996), Bhaduri (1999), and Dutta (2000).

  3. 3.

    Throughout this review we consider a single landlord–tenant interaction. Models with multiple landlords and tenants have been studied in the literature to look at aspects such as strategic delegation (Ray 1999) and endogenous matching (Ackerberg and Botticini 2002; Serfes 2005).

  4. 4.

    A strategic comparison of self-cultivation and share tenancy for a landlord is considered in Das (2009). His model has multiple landlords and peasant families in which any landlord can either self-cultivate or lease his land using share tenancy. It is shown that all landlords opting for share tenancy can be an equilibrium outcome when there is disguised unemployment in labor market. However, the share of the tenant is exogenously given in this model.

  5. 5.

    The literature has mostly considered linear contracts on the ground that contracts observed in practice are usually linear. Stiglitz (1989, p. 23) provides a justification as follows: “In general, nonlinear contracts will do better...Yet most contracts seem to be of remarkably simple form...The best we can say at this juncture is that perhaps the gains from nonlinearities are not very great...and that, if it becomes conventional to employ linear contracts, suspicions will be raised about those who deviate from the norm.”

  6. 6.

    The role of limited liability has been studied earlier by Shetty (1988) who looks at rental contracts to determine contractual structure when there is wealth asymmetry among tenants.

  7. 7.

    To see this formally, let Vi denote the variance from project i. Note that V i = λ i G 2 i − E 2 = EG i − E 2. Hence V 2 − V 1 = (G 2 − G 1)E > 0.

  8. 8.

    Sengupta (1997) considers a model of sharecropping where in addition to exogenous uncertainty, the output under any project depends on the tenant’s effort level. It is argued there that technique moral hazard alone is not sufficient to explain sharecropping. See also Ghatak and Pandey (2000), Ray and Singh (2001), and Dam and Ruiz-Pérez (2012).

  9. 9.

    In this simple model the minimum income below which limited liability takes effect is zero. The value of output under bad outcome is also zero. For this reason limited liability does not affect the payments of a pure share contract (since the payment in the event of bad outcome will be zero in any case). However, if the output under bad outcome is positive but lower than the minimum income level, then limited liability will make a difference in the payments for pure share contracts.

  10. 10.

    For a discussion of India-specific empirical studies on tenancy contracts, see Dutta (2003). See Serfes (2005) for a theoretical explanation of ambiguous empirical evidence in favor of risk sharing.

  11. 11.

    Production uncertainty can be incorporated in this model by taking the production function to be X f (ℓ  ) where X is a random variable with E(X) = 1. As both contracting parties are risk neutral, they only care about the expected value of the output at any ℓ which is given by E(X) f(ℓ ) = f(ℓ )

  12. 12.

    Note that in this model the cost of production is borne by the tenant. However, the rental transfer β can be used to facilitate cost sharing. For example, consider a contract with β = −50 ₹ that is implemented as follows. The landlord pays the tenant 100 ₹ before production and the tenant pays back 50 ₹ after output is realized. Here the landlord effectively shares a lump-sum cost of production. For models of tenancy contracts where there is cost sharing at the margin, see, e.g., Braverman and Stiglitz (1982), Bardhan (1984), and Bardhan and Singh (1987). A tenancy contract may be also interlinked with a credit contract (see, e.g., Bhaduri 1973; Rudra and Bardhan 1983; Bardhan and Udry 1999; Dutta 2003; Kundu 2009).

  13. 13.

    This is what is often assumed in the literature and we will make this assumption in the subsequent analysis. While this seems a reasonable assumption in an agrarian economy with a large number of potential tenants, there is empirical evidence to the contrary. For instance, in his study of mid-nineteenth century tenancy contracts in South India, Reddy (1996) finds evidence where tenants had relatively high bargaining power compared to absentee landlords.

  14. 14.

    In this context, the threat of eviction may either discourage or encourage the tenant to make productive investment in the land. See, e.g., Bardhan (1984), Bardhan and Udry (1999), and Banerjee et al. (2002).

  15. 15.

    Roy and Serfes (2001) explicitly model land productivity as function of labor choices. We take a reduced form approach for ease of presentation.

  16. 16.

    Note from Lemma 1 that the labor employed under any tenancy contract is bounded above by ℓ(1). If ℓ_ ≥ ℓ(1), then labor employed will never exceed ℓ_, so no contract will adversely affect the landlord’s future income. All that will matter is the present income and the Marshallian reasoning in favor of fixed rental contracts will prevail.

  17. 17.

    This section draws from Sen (2005), an earlier working paper version of Sen (2011).

  18. 18.

    Note that unlike the previous models, the two contracting parties receive different prices for their output. For this reason, whether the rental transfer is collected in cash or kind does make a difference to the incomes of the agents. Sen (2011) consider both modes of transfer. Rental transfers in practice may sometimes be more varied. In his study of tenancy contracts in Nellore district of South India between 1850 and 1930, Reddy (1996, p. 81) find items of rent that are neither in cash, nor in kind:“...hunting and game, honey and oil, or medicines and harikathas (story-telling)...”

  19. 19.

    Note that multiple optimal share contracts are possible in both Propositions 3 and 4. Uniqueness of optimal contract can be obtained by imposing more structure to the model.

  20. 20.

    Parts of this section are from Sen (2009), which is a working paper version of Sen (2011). For the contract cited from Taylor (1943), original spelling and sentence structures are retained.

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Acknowledgments

This chapter was written when I was visiting the Department of Economics, Jadavpur University, whose warm hospitality and research support are gratefully acknowledged.

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  1. Department of Economics, Ryerson University, Toronto, Canada

    Debapriya Sen

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  1. Department of Economics, Jadavpur University, Kolkata, West Bengal, India

    Swapnendu Banerjee

  2. Department of Economics, Jadavpur University, Kolkata, West Bengal, India

    Vivekananda Mukherjee

  3. Department of Economics, Jadavpur University, Kolkata, West Bengal, India

    Sushil Kumar Haldar

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Sen, D. (2016). Sharecropping in Theory and Practice: A Selective Review. In: Banerjee, S., Mukherjee, V., Haldar, S. (eds) Understanding Development. India Studies in Business and Economics. Springer, New Delhi. https://doi.org/10.1007/978-81-322-2455-6_5

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