production than time, as represented by a large x in [2], the incidence of owner-farming will be higher.
Finally, Sharecropping is preferred to fixed-rent farming if the landlord’s skills are relatively high,
Marshallian inefficiency losses are low, and the opportunity cost using landlord’s labor is small. Here
again, the incidence of sharecropping increases when skills becomes relatively more important than time.
The basic result of the resource adjustment model is summarized in Figures 2 and 3. Figure 2
illustrates the case where the landlord owns more land (hl) than the tenant (ht) but has identical
endowments of both time and skill. It is clear that a Pareto superior outcome can be achieved by re-
allocating h*-ht units of land from the landlord to the tenant under a fixed-rent contract. Since the provider
of both time and skill is assigned the entire residual under both owner-farming and fixed-rent farming, the
marginal product functions are identical mirror images in figure 2. The shaded area (A) shows the gains
from contracting. The gains are large when the two parties differ only in terms of their land endowment.
However, tenants are likely to have lower skill levels than landlords in most rural economies.16 If
the tenants are relatively unskilled, as shown in figure 3, the gains from fixed-rent contracting (area A) are
much smaller. In this case, sharecropping provides an alternative mechanism where the landlord and
tenant specialize in the inputs they are better endowed with.
As shown in figure 3, the marginal product function for sharecropping is similar to that of owner-
farming because the landlord compensates for the low skill level of the tenant. However, sharecropping
introduces two new costs to the equation: first, the standard Marshallian inefficiency arises because the
residual is shared by both parties, and second, the landlord must re-allocate some time away from his or
her own farm to provide skilled inputs in the sharecropped land. Such a re-allocation of inputs away from
the owner-farmed land when the landlord engages in sharecropping was observed in Indian state of
16 We do not claim that this is necessarily the case. For example, relatively more skilled tenants are observed in the
case of absentee landlords who have no experience in farming and in the case of landlords who are impoverished due
to the exceedingly small size of their inherited holding.
17