Land is a prime factor of production for an agricultural country like Bangladesh and access to land has been the major source of livelihood of farmers living in rural Bangladesh. However, access to land is governed by informal tenure arrangements which in turn affect the productivity of the farm. This thesis looks at the consequences of different contract choices relating to land tenancy arrangements in rural Bangladesh. It consists of three core chapters (Chapter 4, 5 and 6) which include: an analysis of the productivity impacts of sharecropping; an examination of the conditions under which a sharecropping contract is chosen over a fixed-rent contract; and an examination of sources of incentives whereby particular types of tenants end up contracting with particular types of landlords or choosing particular crop practices. Empirical investigations presented in this thesis add to our understanding of the nature of contructual relationships within agricultural land tenancy markets. The first academic contribution of this thesis lies in the comparison of conventional and non-conventional econometric methodologies. Particular emphasis is given to the problems of sample-selection bias and endogeneity in the contract choice that very often plague the estimation results. It is important to have an appropriate measure which controls for the biases in the econometric analysis that arise from the observability problem of certain theoretically important factors such as risk preferences, moral hazard problem which affect impact of tenure arrangements, participation decision as well as motivation for matching. This is crucial because how much certain characteristics affect the contract choice system can provide information about the functioning of a micro-economy. The works discussed herein are mostly econometric analysis, although the thesis has attempted to locate the most relevant theoretical models to explain the econometric outcomes in each chapter. The literature review chapter (Chapter 3) also has a detail explanation of the revelant theoretical models. A two-year household-level panel data set of rice farmers from rural Bangladesh is used to illustrate different corollaries of tenancy contracts. The first core chapter (Chapter 4) attempts to analyse the impact of sharecropping compared with that of owner cultivation. It illustrates the productivity differentials with special focus on the hypothesis of ‘Marshallian ineffciency’,i.e. lower efficiency on sharecropped as compared to owned plots. The main contribution of this chapter is the use of a unique regression model to evaluate the potential impact of adoption of sharecropping measured by the impact on the household’s output. A household’s decision to enter into a crop-share contract is endogenous and may affect his productivity. Therefore, a simultaneous equation model with endogenous switching regression is developed. This method enables us to estimate the causal impact of choosing sharecropping and helps to capture the treatment-effect of sharecropping by controlling for the impact of the selection problem on productivity and the adoption decision. This chapter includes preliminary results from the random-effect, the fixed-effect and the treatment-effect models to evaluate the consistency of estimation results. Our analysis reveals that in rural Bangladesh, the threat of eviction effect¹ dominates the Marshallian inefficiency and sharecroppers are no less productive compared with the owner cultivators. This chapter contributes to an understanding of the factors which generate differences in input and output intensities across two comparative tenure regimes: mixed tenant and pure tenant. Results do not find any strong support for the idea that cropping intensity is relatively higher among pure sharecroppers compared to mixed sharecroppers. The overall empirical results imply that due to non-availability of off-farm jobs, share tenants employ their optimal effort in crop production. The second core chapter (Chapter 5) attempts to identify the determinants of the choice of contracts between a crop-share contract and a fixed-rent contract. The modelling focuses on estimating how heterogeneous risk preferences and the moral hazard problem affect the choice of contracts among the participants in the land-lease market. The analysis draws from the principal-agent model where both parties are assumed to be risk averse. Though sharecropping remains widespread, its determinants are still poorly understood and the debate over the extent of risk preferences and moral hazard are far from settled. The present study jointly determines the socio-economic factors underlying the decision to rent-in/out land and the choice of tenancy contract between a crop-share contract and a fixed-rent contract using a two-stage modified Heckman selection model. The first set of results reveal that a number of socio-economic factors affect a farmer’s participation in the land-rental market and work in opposite directions regarding the decision to rent-in or rent-out land. The likelihood of renting-in land is higher for farmers with insufficient cultivable land but with higher numbers of male agricultural labourers in the household. On the other hand, the likelihood of renting-out land is higher among farmers with higher levels of cultivable land but with lower numbers of male agricultural labourers in the household. Among the households, who participate in the land-lease market as tenants, the results do not support the risk-sharing hypothesis of the agency theory as a motivation for contract choice, while there is some support that the monitoring problem affects the contract choice. The monitoring capacity of the landlord household is an important factor in choosing a particular tenancy contract. The third core chapter (Chapter 6) extends the analysis of the second core chapter with particular focus on the incentives for matching. It studies the presence of potential bias in estimated coefficients of contract choice equations arising from multiple sources of endogenous matching among the landlords, the tenants and the activities and its implications on the contract choice equation. The study finds support for the incentives for endogenous matching in two sources. These are: tenant’s observable proxies for risk aversion impacting the decision of choosing a particular crop practice; and the landlord’s observable risk preferences are significantly related to the tenant’s characteristics although there is no evidence of observed landlord characteristics impacting on the tenant’s proxies of risk aversion. Econometrically the presence of matching biases
the results due to the omitted variable problem, which if not controlled for will cause an inconsistent estimation of the contract choice equation. In fact, this chapter reveals that without controlling for matching the risk-sharing is an important determinant of contract choice. However, after controlling for possible sources of matching, risk-sharing is found not to have any significant influence on choosing a particular tenancy contract. ¹Threat of eviction hypothesis: Uncertainty about contract renewal creates incentives to increase output (and therefore input use) on sharecropping plots in order to qualify for contract renewal. Testable implications would be higher or not significantly lower output on sharecropped plots than on own cultivated plots.Thesis (Ph.D.) -- University of Adelaide, School of Economics, 201
