Abstract
We analyze optimal contractual forms and equilibrium matching in a double-sided moral hazard model of sharecropping similar to Eswaran and Kotwal (1985). We show that, with endogenous matching, the presence of moral hazard can reverse the matching pattern relative to the first best, and that even if sharecropping is optimal for an exogenously given pair of agent types, it may not be observed in equilibrium with endogenous matching. The economy with endogenous matching features less sharecropping compared to an economy with agent types drawn at random from the same distribution. This suggests that studies of agency costs in sharecropping may underestimate their extent if focusing only on the intensive margin and ignoring the extensive margin.
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