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RISK-COPING ARRANGEMENTS IN AGRICULTURE Risk in rural areas is high due to multidimensional reasons: Drastic changes in weather conditions High incidence.

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Presentation on theme: "RISK-COPING ARRANGEMENTS IN AGRICULTURE Risk in rural areas is high due to multidimensional reasons: Drastic changes in weather conditions High incidence."— Presentation transcript:

1 RISK-COPING ARRANGEMENTS IN AGRICULTURE Risk in rural areas is high due to multidimensional reasons: Drastic changes in weather conditions High incidence of infectious diseases Credit market imperfections How do poor peasants cope with risk in rural areas? Main focus in today’s class: “sharecropping”

2 Sharecropping: A contract where output is divided between a landlord and a tenant according to a pre-determined rule (i.e., 50 – 50) Marshallian inefficiency A. Marshall argued that relative to fixed – rent contracts sharecropping is “inefficient” Why? Incentives: Unlike fixed – rent contracts where the tenant retains 100% of the additional output produced, under sharecropping, part of the output goes to the landlord and therefore tenants will undersupply effort

3 Labor Output Costs Production, cost, and economic surplus

4 Labor Output Costs Sharecropping

5 Labor Output Costs Fixed rent

6 So, why is sharecropping so widespread? Tenant is risk – averse Other arguments: a)Risk – neutral tenants and landlords supply effort b)Input costs are shared between landlords and tenants c)Limited liability d)Screening e)Limited liability and non-verifiable effort →WDR (2005), and DR Chapter 5: History, Expectations & Development. Please consult the updated version of your syllabus (course web site).


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