Access to Capital and Agrarian Production Organisation

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There are two problems, both universal, that entrepreneurs in any economy must contend with. Firstly, an agent generally has access only to a limited amount of working capital. Secondly, workers hired by an agent are subject to moral hazard, and this necessitates their supervision. This paper models, for an agrarian economy, the constraints imposed on entrepreneurs' activities by these two problems and endogenously determines the various organisational forms of production, as well as the allocation of resources that will obtain. With a simple model we endeavour to explain a diverse set of empirical observations pertaining to the less developed countries in terms of the general processes that determine the distribution of income among the various agents and the hierarchical relationships that develop among them. Agricultural production typically involves a period of several months between the time the inputs are purchased and the time the output is marketed. Access to working capital and hence to the credit market thus plays an important role in a farmer's production decisions; the distribution of access to credit, in turn, tends to be an important determinant of income distribution. In poor agrarian economies, credit is invariably rationed according to the ability to offer collateral.' The amount of working capital a farmer can mobilise, therefore, depends on the amount of land he owns, which is often a good proxy for his overall wealth and, thus, his ability to offer collateral. Further, since hired hands have a propensity to shirk, they need to be supervised, and, therefore, the