Skills, Partnerships and Tenancy in Sri Lankan Rice Farms

land owned, Xi are the other owned farm inputs, and Zi is a vector of farmer characteristics that includes
skill.

A well-documented flaw of the single equation tobit model is its inability to distinguish the two
distinct, albeit related, events of leasing-in and choice of contract. For example, we expect farmers who
own little land to lease-in relatively more land under either contract. However, among the tenants, those
with more assets, including land, may prefer fixed-rent contracts. A multi-stage generalization of this
model is needed to separate the three different stages of the decision making process; 1) the choice to
lease-in, 2) the choice of contract, and 3) the extent of land leased-in.

Two alternative methods are used to model the first two stages. In the first method, a multinomial
logit model is used to combine the first two choices in to a single decision between three alternatives. In
the second method, the two stages are modeled as sequential probit equations with the contract choice
observed only when the choice to lease-in is made. The extent of land leased-in is modeled in the next
section as a linear regression for each type of tenant with appropriate corrections for sample selection
computed from the choice equations.

Multinomial Logit Model of Contract Choice

A standard multinomial logit specification is used with the choice variable Y where:

Y =    0 if land is not leased-in

1 if land is leased-in under a share-contract

2 if land is leased-in under a fixed-rent contract
and

_e ^{li i} xⁱ

Prob( Y = i ) =----2----- for i = 0,1,2 and β₀ = 0                     [41]

1 + ∑ e& xi

k=1

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