Credit and Land Contracting: A Test of the Theory of Sharecropping

This journal is based on a randomized experiment in a credit program for landless workers and marginal farmers organized by BRAC in Bangladesh. The experiment shows that increased access to credit has a large positive effect on the choice of fixed rent over crop-sharing contracts, both in terms of the number of contracts and area contracted. Choice of a share vs. fixed rent land rental contract has figured prominently in the theory of industrial organization. This theory tells us that, while a share contract is inefficient in a first-best world, it may be the preferred option under second-best conditions. It has thus predicted the existence of sharecropping as the potentially preferred contract, under conditions of liquidity constraint. Furthermore, as predicted by theory, the magnitude of this shift away from sharecropping is enhanced when the tenant is less exposed to risk. Development programs that facilitate access to credit to potential tenants can thus help them take more efficient land rental contracts. Rigorous empirical evidence is, however, still lacking in this theory.

Authors: Das, Narayan C.; Janvry, Alain de; Sadoulet, Elisabeth
Type: Journal Article
Year: 2019