Skills, Partnerships and Tenancy in Sri Lankan Rice Farms

time constraint is binding, the landlord must allocate his or her time so that the income from the entire
holding, not an individual parcel, is maximized. For example, he or she must choose between owner-
farming a small parcel and fixed-leasing the remaining large portion of the holding, or specializing in share-
cropping the entire holding. The first choice avoids enforcement costs but may involve skill costs if the
fixed-rent tenants are inept at management, and vice versa. Therefore, for large farms, the choice is two-
fold: 1) owner-farming a small portion of the holding and fixed-leasing the remaining large portion, and 2)
share-cropping a large portion of the holding and fixed-leasing the remaining (if any) small portion. The
first is preferred if the tenant is relatively skilled (so fixed-leasing is not inefficient), and the second choice
is preferred if the tenant is relatively unskilled. The trade-off between share-rents and fixed-rents is
represented by net gains from the skills used, the re-allocation of landlord’s time, and the enforcement
costs in sharecropping. The greater the time constraint, and higher the marginal value of landlord’s time,
fixed-rent contracts are preferred.

If the landlord’s outside option increases, the incidence of fixed-rent contracts increase. On the
other hand, increasing outside options of the landlord makes sharecropping more attractive than owner-
farming. Therefore, an increase in landlord’s outside options has a positive effect on both fixed-rent
contracts and share-cropping at the expense of owner-farming. Unlike in the small farm case, no single
contract is necessarily optimal for the entire holding. The optimal solution, for large enough farms, may be
a combination of all three types of contracts.

3. The Empirical Specification

The underlying framework of our analysis is the simple leasing model of Bliss and Stern [1982].
Suppose that farmer i owns Fi units of family labor, Xi units of bullocks, and Hi units of land. Then, if the
markets for labor, and bullocks are imperfect, the desired cultivated area (Ci) is

Ci= f (F_i, Xi, Zi)                                                                   [37]

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