Punjab by Bell, Raha and Srinivasan [1995]. They call this a “dilution effect”. The decision to sharecrop
lies primarily on the trade-off between the gains from specialization in the sharecropped land net of the
enforcement costs (area B) and the loss of landlord’s time in the owner-farmed land (area C). The gains
from sharecropping will be large if the differences in skills are large and the marginal
cost of re-allocating time is small. Sharecropping may arise when the tenants have relatively low skills, and
the landlord is able to provide skilled inputs with minimal effects on his or her own farm (minimum dilution
effects).
Comparative Statics: The Effect of Skills and Outside Options
As indicated earlier, the effects of relative management skills and the outside labor market options
on contract choice are different for small and large farms.17 The owner-farming-sharecropping trade-off
is independent of the relative skills of the landlord for small enough farms. In both cases, owner-farming is
chosen when the outside option of the landlord is relatively low. Fixed-rent contracts are chosen when
tenants are relatively skilled and the landlord’s outside options are relatively high. As the relative skill of
the landlord increases, the outside option must rise correspondingly larger for a fixed-rent contract to arise.
Absentee-landlords are an example of relatively unskilled landlords with high outside options.
Sharecropping is preferred when the landlord’s outside options are high enough to make owner-farming
(the provision of both M1 and M2) unprofitable, but relative management skills of the landlord are
sufficiently high to make sharecropping preferable to fixed-rentals. Therefore sharecropping is observed
when the landlords are skilled at farming but do not have enough time, given their outside options, to
engage in self-cultivation.
The analysis of large farms is somewhat different. In the large farm, since the landlord’s labor
17 The absence or presence of a binding labor time constraint for the landlord identifies small and large farms.
Technically, farms sizes are expressed relative to family labor endowments, which for purposes of this paper are
assumed to be identical.
18