Credit rationing, tenancy, productivity, and the dynamics of inequality

Abstract

Why, when given the same resources, might productivity be lower on farms operated through sharecropping than on owner-run farms? The reason is that sharecropping, much less wage contracts, cannot overcome the divergence of interests between those who till the land and those who own it. Only land redistribution can do that. This paper presents notes toward a general equilibrium theory of land tenancy that suggest how changes in technology and publicly provided infrastructure can affect the equilibrium distribution of land in countries where credit is rationed. When credit to famers is rationed, changes in technology can increase the inequality in landholdings - with a long term increase in share tenancy. This is turn might reduce productivity, at least partially offsetting the initial improvements. The paper suggests that the development of effective rural financial institutions would reduce the likelihood of these negative effects on equality and productivity. It further cautions though that past attempts in creating such institutions have failed because of a lack of accountability and of enforcement procedures.Environmental Economics&Policies,Economic Theory&Research,Banks&Banking Reform,Economic Growth,Municipal Financial Management