Horticultural Households Profit Optimization and the Efficiency of Labour Contract Choice

Abstract

In agriculture, the coexistence of different forms of land tenancy or labour contract has been explained so far by several theories related to Marshallian inefficiency, incentives, risk sharing, and transaction costs, including supervision costs. These theories and the empirical evidences have greatly contributed to explain the reasons behind land tenancy or labour contract choice. This study follows up on this. Moreover, it intends to take a further step by focusing particularly on the production technologies at plot level, and by designing and testing a theoretical model based on household profit optimization. This model will take into account the supervision costs of labour (i) to compare optimum profit derived from plots based on household labour, a sharecropping labour contract, and a wage labour contract, controlling for irrigation equipment (ii) to test the efficiency of the labour contract choice using data from Senegal’s horticultural zone. As expected, the production elasticity of labour decreases when improved irrigation equipment like a motor pump is used. The technology displays an increasing return to scale on plots without a motor pump and a constant return to scale on plots irrigated with a motor pump. While on plots without a motor pump the sharecropping contract is the efficient labour contract choice, leading to a higher optimum profit for the household, on plots irrigated with a motor pump, the wage contract is the best labour contract choice. Consequently, we can conclude from this finding that the use of a motor pump drives out the sharecropping contract in favour of household labour and the wage labour contract.land tenancy, labour, sharecropping, wage, contract, supervision, household, profit optimization, efficient, irrigation equipment, horticulture, Senegal, Agricultural Finance,