EC 307 LT Lecture 2 - Land

Land, Agricultural Labor & Land
Reform
EC 307 Development Economics
LT 2012
Lecture 2
Greg Fischer
17 January 2011
70% of the poor world relies on agriculture.
How to help these people technologically
and economically etc.
how to provide them with information,
credits etc.
Agriculture & Land Reform Agriculture & Land Reform
Remain enormously important in world
Close to half of worlds population works in agriculture
50% in China; 57% in India
And most of the worlds poor
Canonical example of missing markets
EC307: Lecture 2 1
Why are we are talking about agriculture
and farms
Introduction to agricultural markets and labor
supply
Critically assess land reform
Develop three analytical tools:
Basic theory for problems of imperfect information:
unobserved actions
Fixed effects
Differences-in-differences
EC307: Lecture 2 2
Goals for this week
actions under the contract are not observable.
1. Puzzles in the efficiency of land use
2. Incentive problems: A simple model of
sharecropping
3. The cases for land redistribution or tenancy
reform
4. Testing the effectiveness of one reform
EC307: Lecture 2 3
Outline for today
sharecropping
reform
EC307: Lecture 2 4
Outline for today
Technology with fixed costs (bullocks, tractors,
etc.)
Larger farms have better access to capital
Larger farms have better access to political
inputs
Better farmers may accumulate more land
EC307: Lecture 2 5
There are many reasons to think large farms
should be more productive than small
Large farms might be more productive than smaller ones: High fixed costs-tractors, Buying fertilizers in bulk for huge lands,
easier access to credits, more bargaining power in selling powers, more probable in investing in learning new techniques
(spread that know how over a large area)
gains of trade
Variance in land quality
Rental markets in some capital goods
Slow pace of technological change: perhaps skill
not that important

EC307: Lecture 2 6
Despite mitigating factors
These factors still persist
Cannot find evidence of positive productivity-
size relationship in the data
Its not from a lack of looking
, but
buying a tractor and renting
it to many farmers
watch this part in lecture

EC307: Lecture 2 7
compare productivity of small to large farms: small farms are more productive..50%, 175%...we are overlooking at the agency
problems...how contract delegates responsibilities and rewards to concerned signees of the contract..workers might not have the
same incentives thus, motivation like the owner farmer
Why might we see decreasing returns?

Agency problems
Large farms cultivated by hired labor
Few incentives to work hard
Small farms are typically owner-cultivated

EC307: Lecture 2 8
So what is going on?
Could land redistribution improve productivity?
these things would have to be true:
the new land will have higher marginal product...there is a good credit market...there is a need for clarity of
ownership..they have to be willing to hire more labor..decreasing MP of labor...but again it comes back to the original
problem..it should be the case that the buyers will work in the farm with the same incentives as before
What do you think?
EC307: Lecture 2 9
Why cant owners give right incentives to
workers?
cant observe how much effort they put, difficult to match fixed wages with the amount of work they do
sharecropping
reform
EC307: Lecture 2 10
Outline for today
Tenant farms land and applies effort e
Unobservable to landlord
Effort is costly to the tenant:
Two possible outcomes
With probability e: Output is H
With probability 1-e: Output is 0
Tenant can choose to work elsewhere and
obtain

EC307: Lecture 2 11
Incentive Problems:
A simple model of sharecropping
2
2
1
ce
w
the extra effort becomes costlier as one
puts more effort
Maximize:
Solution:
EC307: Lecture 2 12
What is the optimal effort level?
2
1
2
(1 )0 eH e ce +
*
0 H ce
H
e
c
=
=
If all I care about is output, e = 1
Comparative statics: how the variable of interest changes by the parameters of the model
When output increases, effort goes up..if cost of effort increases, effort decreses
Effort unobservable
Contract specifies payment to tenant in both
states of world. Write as (h,l)

Some contract types
Wage contract:
Fixed rent:
Sharecropping:

EC307: Lecture 2 13
Contracts take the following form
h H
l
if output is
if output is 0
( , ) w w
( , ) H r r
( , 0) H
in exchange for working on the land, the
farmer gets some amount of the output
Work sequentially, given h and l, what is tenants
effort choice?
Tenant wants to maximize income minus cost of
effort:

So what is the tenants optimal effort choice?

This gives us the incentive compatibility constraint

EC307: Lecture 2 14
Solve for optimal contract without worrying
about limited liability or outside option
2
1
(1 )
2
eh e l ce +
*
T
h l
e
c
=

We want these two efforts level to be equal
The tenant pays r and receives all the income in
every state of the world
This is a fixed rent contract
It also means tenant bears all the risk
EC307: Lecture 2 15
What contract induces the tenant to choose
the optimal effort level?
*
T
h l
e
c
=
*
H
e
c
=
So what does?
Landlord needs to convince tenant to work
Tenant must receive at least the utility of his
outside option
In math:

This is the participation constraint

EC307: Lecture 2 16
Does this pin down the contract (h,l)?
w
* * *2
1
(1 )
2
e h e l ce w + >
Limited liability
Risk aversion
Two-sided effort
EC307: Lecture 2 17
Consider modifications moving towards
reality
eg. more investments to complement
labor
but the same optimality condition doesnt hold for this cus
landlord doesnt have any return to extra investment
Imagine tenant cannot receive a negative
payment

What will l be?

What will e be?

EC307: Lecture 2 18
Limited liability constrains what tenant can
be paid/pay in bad states of the world
Zero: HW

Rewriting
EC307: Lecture 2 19
Return to landlords maximization problem
( , )
max ( ) (1 )(0 )
. .
h l
e H h e l
s t e
e
+
solves tenant's max. problem (IC)
satisfies tenant's participation cnst. (PC/IR)
2
max [ ]
1
. . 2
2
h
h
H h
c
h h
s t h c w h wc
c c
| |
> >
|
\ .
h l h
e
c c
= =
How does effort compare to the case without
limited liability?
Why is effort lower?
What is the effect of increasing the outside
option?
EC307: Lecture 2 20
Interpreting these results
With risk neutrality, the optimal contract forces
the tenant to bear all the risk
If hes risk averse, may want some insurance
from the landlord
Some intuition:
What do you think happens?
Setting up the problem...
EC307: Lecture 2 21
What if the tenant is risk averse?
What are you trying to maximize?
What tools do you have at your disposal
What constraints do you have to satisfy
Participation
Incentive compatibility
EC307: Lecture 2 22
Setting up the contracting problem with risk
aversion
sharecropping
reform
EC307: Lecture 2 23
Outline for today
Return to inverse relationship between land size
and productivity
Potential explanations:
Land quality
Farmer characteristics
Incentive problems
All of the above?
EC307: Lecture 2 24
How important are incentive problems?
Use ICRISAT data
Very detailed panel from Indian villages
Compare inputs and productivity on both types

EC307: Lecture 2 25
Binswanger and Rosenzweig try to separate
ij ij i ij
R o | q c H = + + +
ij
i j H where is farmer 's outcome on plot
ij
R indicates if plot is rented
i
q is an observed but fixed individual effect
i ij
R q Suppose worried that is correlated with
B is -ve if farmers are less
productive in rented lands
but good farmers
might buy the land to
work on
Some individuals cultivate both owner-operated
and rented plots

Control for individual fixed effects
For example, for farmers that cultivate two plots,
can run regression:

and the fixed effect is gone?
EC307: Lecture 2 26
We can account for unobserved individual
characteristics
ij ij i ij
R o | q c H = + + +
( ) ( )
1 2 1 2 1 2 i i i i i i
R R | c c H H = +
cus its the same farmer

What does this suggest?
What could still be wrong?
Note: its not enough to say errors could still be
correlated with RHS variables
Need a plausible story
EC307: Lecture 2 27
Binswanger and Rosenzweig find strong
negative |
( ) ( )
1 2 1 2 1 2 i i i i i i
R R | c c H H = +
plots of land rented might be (is) worse than the one
owned..if we avoid this, we will overestimate the
disincentive to work on the rented land
Finds individuals work 40% more on their own
land (controlling for land size)
Productivity 15% to 30% higher on own land

EC307: Lecture 2 28
Shaban (1987) uses same data but also
controls for plot quality
Suggests incentive problems are key source of
inverse size-productivity relationship
sharecropping
reform
EC307: Lecture 2 29
Outline for today
Prominent in 1960s and 1970s as mechanism
for achieving redistribution and growth
Comes in two flavors
Land redistribution
Tenancy reform
EC307: Lecture 2 30
Land reform
1. Land cannot flee to Switzerland and cannot
hide
But formal ownership is not effective control
2. Fewer distortions
What happens if tax income?
But may be politically very costly
3. Can we assess effect of land redistribution per
se?
What is the effect of wealth shock on recipients?

EC307: Lecture 2 31
Economists tend to think redistributing
money is better, so why redistribute land?
work less hard or
hide that income
sharecropping
reform
EC307: Lecture 2 32
Outline for today
Few studies of efficiency effects of large-scale
property rights reforms
Tend to be accompanied by social unrest
Banerjee, Gertler, Ghatak (2002) study tenancy
reform in West Bengal
Not redistribution
Improvement in tenants rights
If registered, cannot be evicted if pay 25% of output to
landlord
EC307: Lecture 2 33
Does land reform work?
tenants do everything to reap benefits in short term so if we can make
them feel they can own it for longer term, they might invest on the
land for better
Tenant & landlord negotiate over share
Before reform, what happens if disagree?
What happens to tenant share of income?
Is this good or bad for productivity?
EC307: Lecture 2 34
Consider two channels
First: Improved bargaining power
Why might security of tenure have positive
productivity effect?
Consider long-term investments
Why might it have a negative effect?
What are the incentives for effort?
EC307: Lecture 2 35
Consider two channels
Second: Security of tenure
So how do you answer the question?
less worried about
consistency of returns
landlord has less incentive to
invest now
Agriculture & Land Reform Agriculture & Land Reform EC307: Lecture 2 36
The effect of reform:
Looking at simple differences across time
Before After Difference
West
Bengal 1308 1650 342
after: 1650
difference: 342
This difference doesnt
say anything about the
effect of the reform.
There could be other
things happening at
that time..Green
revolution in India etc.
Bangladesh
Neighboring country
Similar agricultural characteristics
No reform
EC307: Lecture 2 37
Consider one part of their paper:
West Bengal vs. Bangladesh
Simple difference across countries
After
Reform
West
Bengal 1650
Bangladesh 1562
Difference 88
Difference-in-Difference Estimator
Before After Difference
West
Bengal 1308 1650 342
Bangladesh 1297 1562 265
Difference 11 88 77
difference is 80..there will more
differences btwn characteristics of
land and land productivity betwn
bangladesh and west bengal..
difference 11 88 77

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Land, Agricultural Labor & Land

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