Credit and Land Contracting: A Test of the Theory of Sharecropping

• Main Authors: Das, N. (Author), De Janvry, A. (Author), Sadoulet, E. (Author)
• Format: Article
• Language: English
• Published: Oxford University Press 2019
• Subjects: Bangladesh; contract farming; contracts; Credit; credit provision; fixed rent; land management; marginalization; rental; rental sector; sharecropping
• Online Access: View Fulltext in Publisher

 Choice of a share vs. fixed rent land rental contract has figured prominently in the theory of industrial organization. This theory tells us that, while a share contract is inefficient in a first-best world, it may be the preferred option under second-best conditions. It has thus predicted the existence of sharecropping as the potentially preferred contract under conditions of liquidity constraint. Rigorous empirical evidence is, however, still lacking on this basic contribution of theory. We use a randomized experiment in a credit program for landless workers and marginal farmers organized by BRAC in Bangladesh to show that increased access to credit has a large positive effect on the choice of fixed rent over share rent contracts, both in terms of number of contracts and area contracted. As predicted by theory, the magnitude of this shift away from sharecropping is enhanced when the tenant is less exposed to risk. Development programs that facilitate access to credit to potential tenants can thus help them take more efficient land rental contracts. © 2019 The Author(s) 2019. Published by Oxford University Press on behalf of the Agricultural and Applied Economics Association. All rights reserved. For permissions, please email: [e-mail].