Moral Hazard: Experimental Evidence from Tenancy Contracts

Agricultural productivity is particularly low in developing countries. Output-sharing rules that make farmers less-than-full residual claimants are seen as a potentially important driver of low agricultural productivity. Results from a field experiment designed to estimate and understand the effects of sharecropping contracts on agricultural input choices, risk-taking, and output is reported. The experiment induced variation in the terms of sharecropping contracts. After agreeing to pay 50% of their output to the landlord, tenants were randomized into three groups: (i) some kept 50% of their output; (ii) others kept 75%; (iii) others kept 50% of output and received a lump-sum payment at the end of their contract, either fixed or stochastic. It is found that tenants with higher output shares used more inputs, cultivated riskier crops, and produced 60% more output relative to control. Income or risk exposure have at most a small effect on farm output; the increase in output should be interpreted as an incentive effect of the output-sharing rule.

Authors: Burchardi, Konrad B; Gulesci, Selim; Lerva, Benedetta; Sulaiman, Munshi
Type: Journal Article
Year: 2018