Share tenancy as a form of land contracting, in which rent is set as a share of output, is widespread across the world. But economists have proved that sharecropping is inefficient as the tenant farmers employ a suboptimal level of effort as they get only a portion of the marginal products. We use a randomized experiment in a newly-introduced credit program for landless workers and marginal farmers offered by BRAC in Bangladesh to show that increased access to credit has a large, positive effect on the choice of fixed rent over share rent contracts, both in terms of the number of contracts and area contracted. Microfinance programs that help relax liquidity constraints on land rental for potential tenants can thus be sources of efficiency gains for the rural poor through the choice of better contracts.
Researchers: Dr Alain De Janvry; Dr Elisabeth Sadoulet; Dr Narayan C. Das; Dr Marup Hossain; Dr Mohammad Abdul Malek; Md. Amzad Hossain; Md. Hasib Reza; Md. Shakil Ahmed
Partners: BRAC; Global Development Network (GDN); International Initiative for Impact Evaluation (3ie)
Timeline: 2012–2014
Status: Completed
Contact: Dr Narayan C. Das
narayan.das@brau.ac.bd
Publications
Journal Article: Credit and Land Contracting: A Test of the Theory of Sharecropping
Journal Article: Agricultural Microcredit for Tenant Farmers: Evidence from a Field Experiment in Bangladesh
Context
Share tenancy as a form of land contracting, in which rent is set as a share of output, is widespread across the world. In the 1970s, about 36% of the world’s total farmland was under pure or owner-cum-share tenancy. In Bangladesh—the context of this study—about a quarter of the cultivated land was rented, 43% of which was under share tenancy contract, in 2008. A share contract is, however, inferior to a fixed rent contract: in sharecropping, tenant farmers supply less effort compared to a fixed-rent arrangement as they get only a portion of the marginal product, a phenomenon famously known as the “Marshallian inefficiency of sharecropping”. But under liquidity constraints, sharecropping is the second-best option for a tenant farmer. Additionally, if the tenant is not willing or able to absorb the production risks and is unable to have insurance, sharecropping becomes preferable to a fixed-rent contract.
While the theory of sharecropping as a potentially second-best efficient contract when the tenant has liquidity constraints is well established, rigorous empirical evidence on the effect of liquidity constraint on the choice of a land contract is limited.
To address the credit constraint of the tenant farmers in Bangladesh, BRAC launched a customized microcredit program for the tenant farmers, known as Borgachashi Unnayan Prakalpa (BCUP) in 2009. A randomized control trial (RCT) was conducted between 2012 and 2014 to measure the impact of BCUP on the tenant farmers. This study used the data from the RCT to assess the impact of liquidity constraint on the choice of the land contract.
Objectives
This study aims to contribute to the theory of sharecropping by answering the question of whether access to credit has an impact on tenant farmers’ choice of tenancy contract, between sharecropping and fixed rent, and whether the impact varies by the level of production risks.
Methodology
A three-stage cluster randomized control trial (RCT) was used in this study. First, 40 BRAC branch offices were randomly assigned to Treatment (20 branches) and Control (20 branches) groups. Then, six villages were randomly selected from each selected branch, with 120 branches in each group. A census was conducted in all the selected villages, 61,322 HHs in total, to prepare the list of all eligible HHs. Finally, 2,155 and 2,146 HHs were randomly selected from the list of all eligible HHs in the treatment and control groups, respectively.
The study conducted two rounds of the survey: baseline (pre-intervention) in 2012 and endline in 2014. It estimated the Intention to Treat (ITT) effect of the program on the outcome of interests. The study investigates the impact of the microcredit program offered to the tenant farmers. Specifically, the study measures the impacts of the program on 1) the livelihood improvement of the tenant farmers; 2) farm productivity; and (3) food security and nutritional status of the tenant households.
Findings and Recommendations
Two years after the onset of the program, approximately 20% of the eligible households had taken at least one credit from BCUP. As predicted, we find evidence that the impact of access to credit on potential tenants on the number of, and area under, fixed rent relative to share contracts is positive, significant, and large in magnitude. However, there are heterogeneities; the impact is larger on farmers who are less exposed to production risk as measured by the incidence of extreme temperatures. Microfinance programs that help relax liquidity constraints on land rental for potential tenants can thus be sources of efficiency gains for the rural poor through the choice of better contracts.
Access to credit had a significant positive impact on the adoption of modern varieties of rice among the intended beneficiaries; however, the positive impact of BCUP on rice yield as well as farm income is significant only among the richest 30% of the tenant households. This means that the poorer tenant households did not benefit from the program. While BCUP increased farm income, it reduced income from wage labour for the tenant HHs; thus, the program had no significant effect on total income, expenditure, or any other relevant outcomes. Our study suggests that facilitating access to credit without addressing other constraints may not be enough to increase investment, profits, and the livelihoods of the tenant farmers.
