The Marshallian Puzzle of Sharecropping - about land tenure and their inefficiencies

1. Introduction

Sharecroppingor sharetenancy is a land tenure system in agricultural production which involves a landowner leasing land in return for a percentage of the output yield to a tenant. Common to all contracts of this kind is that the latter provides labour whereas the former provides the land. Other factor inputs may be provided by either party depending on the contract (Cheung 1968).

Sharecropping “has proved to be one of the most resilient economic institutions” (Taslim 1992), with a remarkable geographic diffusion in many developing nations in Asia and Africa as well as in highly developed countries like the USA. However, in his analysis of land tenure systems, Marshall (1890) argues that sharecropping is inefficient. Arguments for the inefficiency of sharecropping can be traced back to Adam Smith, while Alfred Marshall provided the first clear argument in his'Principles of Economics'. Although for a long time sharetenancy was not subject to scientific discussion, a controversial theoretical and empirical debate about its causes and effects, and in particular about its efficiency and persistence emerged during the 1960s, with its starting point in

the analysis of Cheung (1968), who showed that under certain circumstances, sharetenancy can be efficient. Federico (2006: 6) points out that this intensive debate can be traced back to the emergence of institutional economics as the inefficiency of sharecropping challenges one of its basic principles, “that rational and well informed actors would adopt the output-maximizing solution.”

Another important reason was the emergence of development aid programs from the developed to the underdeveloped countries. In the 1960s and 1970s an important factor in the effort to support the economic development of the South was the attempt to modernize its agricultural sector. Therefore arguments and empirical evidence about the efficient allocation of resources and the 'right' land tenure system became essential for development policy.

In this paper I will examine Marshall's inefficiency argument (part 2) and contradicting analysis (part 3). I will discuss a) Cheung's landowner model, b) the inclusion of incentive problems and c) uncertainty. As these analyses do not provide convincing arguments for the persistence of sharecropping, I will examine the influence of imperfect markets and information in developing countries. In the following critical assessment (part 4) I will identify some flaws of the whole discussion which can be found in the poor empirical basis about the (in)efficiency of sharecropping, the constricted horizon of econometric analysis on social relations and the avoidance of questioning existing property rights.

2. The Sharecropping Puzzle

The Marshallian model (Marshall 1890) of sharecropping analyses factor allocation of labour in agricultural production from the tenant's point of view, assuming that the tenant is a profit maximiser in a competitive market and can choose between allocating his labour between wage employment at an exogenously-fixed wage rate'w'or sharecropping land at a landlord's share of the output's'.

Figure 1 shows two Total Value Product (TVP) curves.The total output curve of the farm is represented by'TVP'.The total costs, which are equal to the wage rate as they represent the opportunity costs of sharecropping instead of the wage labour of the peasant, are represented in curve'TC'.¹ In point'C'the curve intersects'TC',which implies that any further unit of labour of the tenant would be more efficiently used for wage labour. The Pareto efficient allocation² of labour would therefore be reached with an input of labour'L e ', producing output'Y e '. However, as the sharecropper shares the output with the landlord, 's'representing the landlord's share and1-sthe tenant's share, the tenant's economic interest is below the TVP curve of the farm (curve'(1-s)TVP') by a margin ofs%. The efficient allocation of labour from the tenant's viewpoint is to produce until point 'E' with an input of labour'L s ',producing output'Y s 'and allocating any excess labour to the wage labour market. The yield of the farm under sharecropping is Ye – Ys lower than under Pareto efficient production and is therefore inefficient (Ellis 1993).

Figure 1: The Marshallian model of sharecropping: Total Output Curves

illustration not visible in this excerpt

according to Ellis 1993, p. 149

This inefficiency can also be shown with the Marginal Value Product Curves of the farm'MVP'and that of the tenant'(1-s)MVP'in Figure 2.Here it becomes obvious that the tenant does not lose income when producing at'L s ',as her income equals the wage rate'w'whether she produces at'L e 'or at'L s '. The economic waste to the society, represented by the areaBEC,is borne by the landlord, since it lies entirely within her share. Furthermore, the landlord's income is lower under the sharecropping contract than it would be if self-cultivation with wage labour were used to cultivate the land. Area ABEH represents the potential income of the landlord with self-cultivation and the area DHE her loss under a sharecropping arrangement.

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¹ Any other factor costs are not considered in the Marshallian model.

² A factor allocation is Pareto-efficient when there can be no further improvements reached with another allocation without making any other individuals (in this case the tenant and the landlord) worse-off.