Abstract
We analyze optimal contract choice in agriculture when there is joint moral hazard on the part of the farmer in the supply of effort and the riskiness of the technique of cultivation. In the presence of limited liability, high-powered incentive contracts such as fixed rental contracts will induce the farmer to adopt techniques of cultivation that are too risky from the point of view of the landlord. On the other hand, low-powered incentive contracts such as fixed wage contracts will induce the farmer to supply too little effort. We show that sharecropping contracts emerge as a natural solution to balance these two conflicting considerations.
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