Informational Rents and Property Rights in Land

Is the institution of land tenancy inefficient? If so, why does it survive? This paper uses a complete contracting framework to develop a theory of land ownership in the context of a labour surplus, subsistence economy. Ownership affects efficiency in the presence of incentive-based informational rents, and endogenous credit rationing, both arising from wealth constraints. A ceteris paribus transfer of ownership to a tenant or hired labour results in higher bargaining power and rent capture by the cultivator. This explains why small owner cultivated farms relying on family labour exhibit higher productivity and welfare (in a utilitarian sense). Nevertheless, tenancy results in a Pareto efficient outcome: the market will never effect such transfers, as tenants will not be able to borrow enough to purchase land. The model predicts that productivity differences between tenant and family farms will be large when population pressure on the land is high, alternative employment opportunities of farmers are low, and their wealth levels are neither too low nor too high.