Implications of Agency Theory for Optimal Land Tenure Contracts

For more than 2 centuries, economists have been interested in agricultural contracts, especially landowner-tenant contracts. The early work by Marshall (1890) argued that share tenancy was inefficient relative to owner cultivation and should not be expected to persist when other arrangements are available. Later D. Gale Johnson (1950) and Cheung (1969) argued that, if landowners can costlessly monitor and enforce tenants’ effort, then share tenancy can compete effectively with owner cultivation or cash rental. Subsequently, Stiglitz (1974) and Newberry and Stiglitz (1979) introduced principal-agent models in the more realistic case where monitoring is costly to study optimal landowner-tenant risk sharing given the need to study adequate tenant incentives. More recently, Prendergast (2002) suggested that the negative trade-off between effort incentives and risk is tenuous or wrong in principal-agent contracting, including share tenancy in agriculture. Allen and Lueck (2002) have also argued against risk sharing as a motive for share tenancy in developed countries because of the presence of well-developed instruments for risk sharing that are available regardless of tenancy arrangements. Based on transactions costs, they predict that cash rental is more likely than share rental when farmland value is low.