Wage labor, sharecropping, and credit transactions
Subramanian, S.
Oxford Economic Papers 47(2): 329-356
1995
ISSN/ISBN: 0030-7653 DOI: 10.2307/2663563Document Number: 402885
A common feature of many rural economies is the interlinking of transactions on several markets. Of these, the interlinking of sharecropping contracts and transactions on other markets has received the greatest attention in the literature. In these cases, the tenant may depend on the landlord for loans, for the provision of inputs and for marketing of the harvest. Interlinking can therefore have significant consequences for the welfare of both landlord and tenant and for aggregate output in the rural economy. The paper studies the rationale for interlinking under uncertainty and endogenous effort and the terms of the optimal contract. It assumes that tenants participate in the labour market, which changes the mechanism by which interlinking works. It is shown that typically the consumption loan interest rate is higher than the landlord's cost of capital while production credit is subsidized. This provides a partial explanation for a wide range of interest rates observed in these contracts.