Abstract
This paper studies the determinants of agrarian tenancy contract choice and its implication on productivity in prewar Japan. Rapid agricultural growth under extensive tenancy relationships in prewar Japan was achieved with the prevalence of a unique rent reduction contract, which was more efficient than a share tenancy or a pure fixed-rent contract in terms of provision of incentives and risk-sharing. Despite its potential efficiency, a rent reduction contract incurred substantial transaction costs, which may have inhibited its adoption outside Japan. The prevalence of this contract in prewar Japan was likely due to the presence of villages that reduced such costs through informal governance of the private tenancy relationships. We found quantitatively at the village level that the choice of tenancy contract in prewar Iwate prefecture was affected by risk and possibly transaction costs. Furthermore, a sign of Marshallian inefficiency was found at the prefecture level, where the prevalence of tenancy and productivity is negatively correlated and such inefficiency was worse in prefectures with a greater proportion of share tenancy.
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