Skills, Partnerships and Tenancy in Sri Lankan Rice Farms

propose that we re-interpret the second input as labor. In this case, a clearer justification must be given as
to why tenant may hold an absolute or comparative advantage in providing labor.

In the next section of this paper, we formalize this more general idea by assuming that landlords
are time constrained and tenancy is really a solution to a time allocation problem. The two key inputs are
skills and time, and they are combined in different proportions to perform each farm activity. We
introduce three new features to the standard principal-agent model: 1) tenants are not assumed to have an
absolute advantage in any type of skill; 2) landlords are assumed to have time constraints; and 3) landlords
are allowed to retain parts of their holding for owner-farming (i.e. there may not be a single optimal
contract for the entire holding). These generalizations allow us to formulate empirically testable
propositions that accurately represent the environment that is studied, and provide a sound theoretical basis
for the empirical analysis.

The second section of this paper develops an empirical test of farming skill effects on contract
choice. A significant obstacle to empirical analysis is the difficulty of measuring farming skills. A few
studies [Skoufias 1991, 1995, Lanjouw 1999] have established that skilled farmers lease-in larger extents
of land, but have not examined the interesting issue of contract choice. Unlike in the previous studies, an
index of farming skills is constructed from the observed production data using a stochastic production
frontier approach. This method does not require panel data or rely on the restrictive assumption that skills
are time invariant.

The third section describes the data and formulates testable propositions. The fourth section
discusses the results, and the fifth section concludes with a summary of the main results and policy
implications.

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