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Vestfold College : Library : Publication Series | Faculty of Social Science |
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Copyright © 2001 The author / Vestfold College |
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Social Status and Work Incentives in Sharecropping. A Note Jon Reiersen* Tønsberg:
Vestfold College, 2001
[ Contents - Top of page ] 1. Introduction In recent years, economists have returned to the role of institutions in economic development. By exploring problems of imperfect information and missing markets, progress has been made in explaining the underlying rationale and consequences of different economic institutions often observed in agrarian economies in the Third World.1 Recent theoretical literature has, however, left little room for influences arising from cultural values and social norms. A fuller understanding of agrarian organization in the Third World, including its variation across major regions, thus requires that the social and cultural contexts in which people operate must be taken more seriously. It will be argued in this paper that in rural Bangladesh (as elsewhere) economic action is constrained and shaped by social concerns and influences. In particular it will be shown how the quest for social status may explain why landlords have such a strong preference for landed rather than landless tenants. About 80 million of the 90 million people who live in rural Bangladesh depend on agricultural activities for their income and employment. There is, however, an extreme scarcity of both land and opportunities for employment, and it is for these two sources of income that people compete. It is estimated that about 48 percent of rural households in Bangladesh are landless, or have so little land that they are dependent on leasing in land or working as wage laborers in order to maintain their material standard of living. Land leasing is an important feature of agriculture in Bangladesh. About 23 percent of the total cultivated land is farmed under various tenurial arrangements. The most common tenancy arrangement is sharecropping, which accounts for nearly 90 percent of the total leased land (Januzzi and Peach, 1980). The competition for land to sharecrop in Bangladesh is fierce. Empirical evidence reveals that it is almost impossible for a landless farmer to obtain land on a sharecropping basis. Tenants are drawn mainly from the group of farmers possessing some land on their own (Hartman and Boyce, 1983; Jansen, 1986; Rahman, 1986; Ahmed and Taslim, 1992). These observations have been explained by landlords' reluctance to lease out their land to tenants with little to contribute other than their labor. Land-owning tenants have a comparative advantage over landless tenants in the acquisition of farm assets such as draught animals and irrigation equipment, and they generally have better access to credit. In addition, landless tenants may lack the necessary skills required to cultivate the rented land properly (e.g. choice of crops, proper land and water management, selection and timely application of inputs, etc.). This paper does not question the importance of these factors. Instead it will be argued that increased productivity due to land ownership is not the only reason why landlords prefer landowning tenants. Because of its effect on norms and preferences, land ownership makes the landed tenant more attractive to the landlord by reducing problems of work incentives. As will be shown, land ownership contributes to what Bowles et.al. (2001) have termed incentive enhancing preferences. Land ownership gives rise to individual traits that contribute to labor discipline, which are valuable to landlords. The aim of this note is to show that once these considerations are taken into account, we are able to achieve a fuller understanding of why landlords in Bangladesh have such a strong preference for landed rather than landless tenants. The next section presents some empirical evidence concerning social organization in rural Bangladesh. A simple model of the sharecropping relationship is then formulated, showing that when effort is non-contractible variations in preferences will affect the tenant's choice of effort and hence the income of the landlord. [ Contents - Top of page ] 2. Some Evidence from Rural Bangladesh In most of the theoretical literature on agrarian organization, different forms of land tenancy and labor contracts are modeled together as substitutes along a continuous spectrum of possible contracts.2 But this assumption does not correspond so well to the actual social context of rural Bangladesh. Bangladesh rural society is highly differentiated, with rich landowners at the top and landless wage laborers at the bottom, while owner cultivators and sharecroppers come in between (Jannuzi and Peach, 1980; Rahman, 1986; Jansen, 1986). 3 A person with abundance of land can expect to be treated favorable by other individuals, and this may give rise to both economic and social rewards (through transfer of market good, marriage, transfer of authority, respectful treatment, etc.). Because of these rewards, individuals seek to maintain and increase their social status through appropriate choice of actions and investments in land. At the other end of the social ladder, smallholders enjoy superior status compared to wage laborers. There is strong social stigma attached to being a wage laborer in rural Bangladesh. Working as a wage laborer in the casual labor market means being socially derogated to the bottom rung, or in the words of Rahman (1986); "(...) poorer households with abundant labor supplies try hard to find agricultural land for sharecropping. There are social pressures to remain in cultivation rather than become wage laborers in rural Bangladesh. (...) The sharecroppers, though getting no positive returns from cultivation after deducting the cost of their labor, still hang on to the system (...) as they derive some psychological satisfaction from being krishaks (farmers)." (p. 163). Hence, smallholders usually do not regard wage employment as an acceptable alternative, at least in the short run, as is usually assumed in the theoretical literature. At the same time, the great majority of smallholders in Bangladesh have too little land relative to their endowment of labor power. They therefore face the problem of an excess of labor power that cannot be gainfully employed on their own land. A solution to this problem may be to lease-in land. Land leasing is therefore attractive for at least two reasons. Cultivation of leased land provides a solution to the problem of employing excess labor power. Secondly, cultivation of leased land is a socially acceptable solution. By being a sharecropper you keep your social status as an owner-cultivator. However, having access to a sharecropping contract does not necessarily represent a long-term solution for a tenant. In Bangladesh, most share-contracts have a short duration, usually one year (Januzzi and Peach, 1980; Singh, 1988). A short-term lease enables the landlord to evict the tenant if he is not satisfied with the tenant's performance.4 The threat of eviction can thus be seen as an endogenous enforcement mechanism that secures the landlord's objectives in the relationship.5 By paying the tenant an income slightly higher than the tenant's next best alternative, coupled with a threat of eviction, the landlord can induce the tenant to work hard on the sharecropped land when effort is non-contractible. For a land-owning tenant, eviction does not simply deprive him of the opportunity to earn an income from the sharecropped land in the current period. He may also be forced to enter the casual labor market in order to meet his minimum subsistence need. Because of the social stigma attached to such work, this represents an additional social cost for the landed tenant. In contrast, a landless farmer who has already worked as a wage laborer will generally have no objections about taking up wage employment as an alternative to sharecropping. He has no social status to defend. A landed tenant is therefore likely to work harder in order to avoid being evicted, all else being equal. Hence, a landlord will prefer a landed rather than a landless tenant. In the next section the argument will be clarified with the aid of a simple model. [ Contents - Top of page ] 3. A Model of the Sharecropping Relationship Consider a non-cultivating landlord leasing out a given plot of land on a sharecropping basis. At harvest time, the crop The lease is closed for a period of at least one crop season and is repeated infinitely so long as the landlord is satisfied with the tenant's performance. If the tenant's performance is not satisfactory to the landlord, the contract is not renewed and the tenant is evicted. The tenant's performance, however, is not easy to verify in a complex and uncertain agricultural environment, and hence cannot be determined by contractual agreement. The landlord has to rely on an imperfect measure of the tenant's work intensity and monitor the tenant randomly. The probability At the level of effort expected by the landlord, work is subjectively costly for the tenant to provide. We assume that the utility of the tenant depends positively on income and negatively on labor input in the following way (1) where When choosing how much labor to supply on the sharecropped land, the tenant must consider both short- and long-term costs and benefits. Working less hard today means more time is available to dedicate other activities, but a higher probability of eviction (and hence less income) later. The value of having a sharecropping contract can thus be defined as the present value of the tenant's future income, taking into account the probability of eviction. If (2) where The tenant chooses labor input (3) The first term of (3) shows the tenant's direct gain from higher income when labor input on the sharecropped land is increased (his share of the marginal product of labor), while the second term shows the expected indirect gain arising from increased labor input. Equation (3) defines the tenant's reaction function
Figure 1. Equilibrium share and effort levels for the landlord and the effect of a reduction in the tenant's fallback position.
The landlord determines the value of the share
Both the landed and landless tenant will choose labor input so as to satisfy the first order condition, given by (3). Graphically this means that they will choose an effort level along their reaction function Figure 1 shows the effect
of a decrease in [ Contents - Top of page ] 4. Concluding Remarks The main objective of this paper has been to explain why landlords in rural Bangladesh have such a strong preference for landed rather than landless tenants. The existing literature has emphasized that farmers with some land of their own possess farm assets and skills that make them more productive as tenants. But there is also be another mechanism that may explain why land-owning farmers are attractive as tenants. The hierarchy of social status in rural Bangladesh transforms land-owning tenants' preferences in ways that are profitable for landlords. The greater cost of losing tenancy for a landed tenant, stemming from his socio-psychological aversion to offering his labor in the casual labor market, induces him to cultivate the rented land with greater care and intensity compared to a landless tenant with no social status to defend. Therefore, the landlord gets a higher return if he rents out his land to a landed rather than a landless farmer. [ Contents - Top of page ] Appendix Solving for (A1) Maximizing (A1) with respect to (A2) which gives the first order condition (3). Proof that It will be assumed that the second order condition for a local maximum is fulfilled. Hence, (A3) Differentiating (4) totally with respect to (A4) Inserting for (A5) Proof that an increase in Differentiating (4) totally with respect to (A6)
Inserting for (A7) An increase in [ Contents - Top of page ] References Ahmed, F.U. and Taslim, M.A. 1992. An Analysis of Land Leasing in Bangladesh Agriculture, Economic Development and Cultural Change, 615-628. Bardhan, P. ed. 1989. The Economic Theory of Agrarian Institutions. Oxford. Clarendon Press. Bowles, S. and Gintis, H. 1990. Contested Exchange. Politics & Society, 18, 165-222. Bowles, S., Gintis, H., and Osborne, M. 2001. Incentive-Enhancing Preferences: Personality, Behavior and Earnings. American Economic Review, 91, 155-158. Hartman, B. and Boyce, J.K. 1983. A Quiet Violence; View from a Bangladesh Village. London. Zed Press. Hayami, Y. and Kawagoe, T. 1993. The Agrarian Origins of Commerce and Industry - A Study of Peasant Marketing in Indonesia. London. Macmillian Press. Hayami, Y. and Otsuka, K. 1993. The Economics of Contract Choice; An Agrarian Perspective. Oxford. Clarendon Press. Jannuzi, T.F. and Peach, J.T. 1980. The Agrarian Structure of Bangladesh; An Impediment to Development. Colorado. Westview Press. Jansen, E. 1986. Rural Bangladesh; Competition for Scarce Resources. Oslo. Norwegian University Press.
Scott, J.C. 1976. The Moral Economy of the Peasant. New Haven. Yale University Press Shapiro, C. and J. Stiglitz, J. 1984. Equilibrium Unemployment as an Worker Discipline Device, American Economic Review, 74, 433-444. Stiglitz, J. 1988. Economic Organization, Information, and Development. In Chenery, H. and Srinivasan, T.N. Handbook of Development Economics, Vol. I. Amsterdam. North Holland. [ Contents - Top of page ] Footnotes [Back] * The paper is part of the project "Institutions, Social Norms, and Economic Development". I have received helpful comments by Kalle Moene. Financial support from the Norwegian Research Council is gratefully acknowledged. [Back] 1 The main message from this literature is that different institutional arrangements and contracts emerge as substitutes for missing credit and insurance markets in an environment of pervasive risks, information asymmetry, and moral hazard. For examples and overviews of the literature, see Stiglitz (1988) and Bardhan (1989). [Back] 2 An underlying assumption in almost all the theoretical literature on contractual choice is that economic agents pursue only their own material self-interest, and do not care about social values and norms. Very often, the theory of the principal-agent relationship serves as a major tool to determine optimum contracts that are supposed to strike a balance between risk and incentive effects. See, e.g., Stiglitz (1988) and Hayami and Otsuka (1993) for an overview of the literature. [Back] 3 See also Scott (1976) who notes: "The whole conventional hierarchy of status among the rural poor is usually smallholder, tenant, wage labourer. These are not, of course, mutually exclusive categories, since it is common to find cultivators who simultaneously own some land and farm additional land as tenants, as well as wage labourers who have a plot of their own. Yet, (...) these categories have had a social reality in preference and status in the countryside despite the fact that the categories could overlap considerably in terms of income." (p. 35). [Back] 4 As noted already by Adam Smith in his Wealth of Nations, there is a disincentive effect inherent in share-contracts. Since a sharecropper only receives a fraction of his marginal product of labor, he has an incentive to put in less effort on the land than he would if he owned the land himself. [Back] 5 See also Jansen (1986) who reports from village Bangladesh that; "Through interviews with the older men in the village we received the clear impression that sharecropping contracts lasted much longer a few decades ago (...). The consequences of the shortening of sharecropping contracts are that more plots for sharecropping are on the "market" (...). [This] means less security for the tenants and increased possibilities for the well-to-do landowners to take advantage of the insecure situation." (p. 174-175). [Back] 6 This paper focuses attention on landlords' selection of tenants given that sharecropping has been adopted. There exists a large body of literature that attempts to identify conditions under which sharecropping is superior to alternative contractual arrangements. (See e.g. Hayami and Otsuka (1993) for a survey of the literature.) Sharecropping may perform a variety of functions. It permits risk sharing when insurance markets fail, it can serve as a mechanism to screen workers of different qualities, and it can correct market imperfections for inputs other than land. This paper abstracts from all this by studying a situation where the landlord has already decided to lease out the land on a sharecropping basis. [Back] 7 Models of this type are analysed in Shapiro and Stiglitz (1984) and Bowles and Gintis (1990), both studying the employer-employee relationship. [Back] 8 For simplicity we assume that income and disutility of effort are both evaluated at the end of the period. [Back] 9 Recall that the typical landed tenant has too little land to secure an income over the subsistence minimum. He is therefore dependent on alternative activities to employ his excess labor power. [Back] 10 This formulation implies that we consider the landlord-tenant relationship as an infinitely repeated game. [Back] 11 Clearly, the landlord's threat of eviction is credible only if [Back] 12 When making an offer to the tenant the landlord has to balance two effects working in opposite directions. An increase in the share will enhance the tenant's effort, raising output on the sharecropped land and thus the landlord's income. But at the same time an increase in the share also reduces the landlord's income. As long as the indirect gains from an increased share exceed the direct loss ion income of the increase, a higher share will be offered and the cost of loosing tenancy will be positive. [ Contents - Top of page ] |
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is divided between the tenant and the landlord, with the tenant receiving 
and the landlord receiving 
, where 
. The size of the crop depends on the tenant's work intensity and the care he invests in the tasks involved in the cultivation process (summarized in the variable
), i.e. 
with 
.
that the tenant's performance is not found satisfactory by the landlord depends on the amount of labor input supplied by the tenant on the sharecropped land, i.e. 
with 
. Hence, 
is the probability of eviction, which is decreasing with the amount of labor supplied by the tenant. The decision structure is as follows. First the landlord chooses the share 
to maximize his own income, then the tenant chooses how much labor to supply on the sharecropped land.
is the tenant's disutility of labor (assumed for simplicity to be constant).
is the tenant's rate of time preference, the present value (
) of expected utility of starting out as a sharecropper is given by 
is the tenant's fallback position, i.e. the tenant's best available utility
from alternative activities.
during this period plus the present value 
if not evicted, that occurs with probability 
,
plus the present value 
if evicted, that occurs with probability 
.
to maximize the present value of expected utility, given in (2). Solving for 
in (2) and maximizing with respect to 
we get the following first order condition for the tenant (see appendix)
indicates the decrease in the probability of eviction by increasing labor input, and 
is the value of holding a sharecropping contract (the difference between the value of utility from being a sharecropper and the value of utility from being a casual laborer). The quantity 
can thus be interpreted as the cost of losing tenancy, a cost which the tenant seeks to avoid through hard work.
, which shows the
level of effort 
by
the tenant for any given share 
, knowing
that a higher share for the tenant induce him to put in more effort.
is illustrated in 
represents share/effort
combinations yielding the same income for the landlord. Preferred iso-income
curves lies to the right, i.e. 
.
. However, the structure of social relations in which the landed tenant is embedded enhances his work incentives compared to the landless tenant. If evicted, the landed tenant may be forced to enter the casual labor market, which means being socially derogated. In contrast, the landless tenant has no social status to defend. If evicted, he loses the contract rent, but has no objection taking up waged employment as an alternative to sharecropping. The quest for social status will, in other words, increase the desirability of retaining the contract for the landed tenant. If the landed tenant can secure a renewal of the lease, he can make a fuller utilization of his otherwise unemployable labor power. If the lease is terminated, part of his labor power will remain under-utilized, alternatively he may be forced to enter the casual labor market and be socially derogated. The stream of utility for the landed tenant in alternative activities is thus lower compared to the landless tenant. This can be modeled as a reduction in 
for the landed tenant, raising the marginal subjective benefit of effort. A reduction in 
.
The new equilibrium pair (
)
is illustrated by the tangency point between the iso-income curve 
of the landlord and the new effort response curve, leading to a reduction
in the tenant's share and an increased effort. Clearly this is in the
interest of the landlord. Hence, the landlord will get a higher return
if he leases out the land to a landed rather than a landless tenant. 
in (2) gives 
gives
is increasing in 
defined by (A3) must be negative
where
in (A4) we get 
shifts downwards the tenant's reaction function:
, we get
where
in (A6) we get 
. If 
, the tenant is indifferent between being a sharecropper and alternative employment opportunities and it makes no sense for the landlord to supervise the tenant's labor input. The tenant would not care about the supervision, since he is in a position to shift to other activities at no cost.