1 Introduction
The prevalence and persistence of land tenancy contracts have intrigued economists from the
days of Adam Smith [1776] and Alfred Marshall [1890]. Although a large and fascinating literature has
since evolved on this topic, many important questions on the existence of land tenancy contracts remain
unresolved.1 The goal of this paper is to provide a theoretical and empirical answer to one such question,
the role of farming skills in the choice between fixed-rent and share-rent contracts.
The idea that skilled farmers obtain fixed-rent contracts dates back to Spillman [1919] who argued
that farmers climb an “agricultural ladder” from agricultural labor to share-tenancy and then to fixed-rent
tenancy through the gradual acquisition of skills. The ladder hypothesis has important policy implications
that are especially relevant to countries, like Sri Lanka, that have attempted to discourage sharecropping
through legislation. For example, the model developed in this paper shows that a time scarce landlord will
prefer a fixed-rent contract provided that the tenant is sufficiently skilled. Therefore, narrowing the skill
gap between landlords and tenants is the key to changing the tenancy mix in favor of fixed-rent farming.
Secondly, removing the sharecropping option from the tenancy ladder through legislation leaves agricultural
labor as the only option for unskilled tenants. Sharecropping provides a vital link by which unskilled
tenants acquire the necessary management skills in partnership with landlords. The empirical estimates
show that yields obtained by unskilled sharecroppers if they were to fixed-rent are too low to be feasible.
Over the years, the tenancy ladder has remained largely a “verbal hypothesis”. [Otsuka and
Hayami 1993]. The screening model proposed by Hallagan [1978] has attempted to formalize this idea
using an adverse selection argument. The critical assumption of this model is that landlords do not observe
the entrepreneurial skills of potential tenants. He argues that landlords can choose the contract
parameters (share and fixed rents) to induce utility maximizing tenants of different abilities to self-select in
1 See Hayami and Otsuka [1993] for an excellent survey of the tenancy literature.