Reverse-Share-Tenancy and Marshallian Inefficiency - International ...

3. THEORETICAL MODEL
Starting from the reverse share tenancy scenario and the inherent tenure insecurity in the Ethiopian tenure
system, we draw on a two-period utility maximization model developed by Kassie and Holden (2007,
2008) to show how the threat of eviction by the landlord upon unsatisfactory performance increases the
performance or incentives of an agent to work hard in the first period and thereby reduces the Marshallian
disincentive effects on the output of sharecropped land.
We assume that the tenant is risk averse and maximizes expected utility (U) of income (Y) from
farm production (Q) from Peasant Association (PA) allocated land (A o ) and leased land (A r ) with the
probability ( η)
of carrying the rental contract through period two to produce Q r2 . We assume that the
probability of contract renewal ( η)
in period two depends on the amount of output produced in period
one (Q r1 ) and on kinship relations between the landlord and the tenant, measured by ( κ)
. In addition, we
assume that the economic and tenure security of the landlord (S) is a critical factor affecting the
probability of contract renewal. 5 Hence, the probability of contract renewal is given by
2
r1
η = η( Q , κ, S), and
∂η r1 > 0,
∂η > 0,
∂η < 0,
∂ η
r1
> 0
∂Q ∂κ
∂S
∂Q ∂S
. (1)
Thus, we assume that good performance is more important to reduce the threat of eviction
(probability of contract renewal) when tenants deal with landlords with higher tenure security and strong
socioeconomic status, which ultimately decrease the search costs and thereby the cost of eviction of the
tenant. We assume eviction threats could be harder to impose by landlords with weak bargaining power
and insecure property rights conditions due to their poor bargaining position and economic dependence.
When landlords enjoy tenure security and stronger economic conditions (better bargaining power), the
threat of eviction upon unsatisfactory performance is real and high, forcing tenants to cultivate the leased
land with greater care and intensity. In contrast, when landlords are economically dependent and tenure
insecure, this may undermine their power of eviction, in which case the Marshallian disincentive effects
are visible (Kassie and Holden 2007, 2008).
Following Kassie and Holden (2007) a two-period utility maximization model for a
sharecropping owner-cum-tenant is developed and given by
o1
⎧ pq 1θ
1Q ( Ao 1, xo 1, zo 1, zh 1)
px 1x
⎫
⎪⎣
⎡
−
o1⎦ ⎤
⎪
Max EU(Y) = EU1
⎨ ⎬
A
1
it , xit
, z
r
it
⎪ ⎡pq 1θ1Q ( Ar1, xr1, zr1, zh 1)
β px 1x
⎤
⎩
+ ⎣
−
r1⎦⎪⎭
⎧
⎪
⎡
⎣η( Q (.), κ, S). p θ Q ( A , x , z , z ) β − p x
+ ρEU2
⎨
o2
⎪+ ⎡pq2θ
2Q ( Ao2,
xo2, zo2, zh2)
px2x
⎤
⎩ ⎣
−
o2⎦
r1 r2
q2 2 r2 r2 r2 h2 x2 r2
, (2)
where β is the output share going to the tenant in a pure sharecropping arrangement; the subscripts o =
PA-allocated plots, r = leased plot, and 1 and 2 indicate period one and two, respectively; ρ is the
1
discount factor given by , and δ is the discount rate; x is conventional inputs (fertilizer, labor,
1+
δ
⎤⎫
⎦⎪
⎬
⎪⎭
5 Bezabih and Holden (2012) shows that female landlords who are assumed to have a poor socioeconomic and property
rights status are less likely to exercise their power of eviction due to high search costs and insecurity of land ownership. In our
study, gender, the income-generating ability of the landlord, whether or not the landlord is a pure or cultivating landlord, and
possession of a land use certificate by the landlord household are the four key variables used as indicators to capture the
economic and tenure security parameter (S).
5