Uncertainty and the Choice of Tenure Arrangements: Some Hypotheses

Abstract

Recently, in this Journal, Adams and Rask and Boxley discussed the problem of tenure arrangement, in particular the apparent misallocation of resources under share tenancy. Their analyses operate within a framework of certainty and do not explicitly consider many of the conditions of the lease contract that are subject to negotiation. However, to gain a more complete understanding of why differing tenure arrangements exist and the conditions under which parties to the lease prefer one arrangement over the others, a more realistic framework is required. This paper attempts to move in this direction by relaxing the assumption of certainty. As a first step, we investigate how differing tenure systems alter the risk to landowners and tenants. We then identify and investigate a few of the factors affecting the choice of tenure arrangement when uncertainty is an inherent factor. Given certainty, landowners and tenants are presumably concerned solely with their income. But when uncertainty is introduced, both the level of income and its variability need to be considered. Uncertainties in farming are caused largely by the uncertainties of nature, changing technology and market conditions, factors that are beyond the control of, and often also the insurability by, individual farmers. In other words, a farm produces not a known income but a probability distribution of income. Given a probability distribution of income that can be produced from a piece of land, the probability distribution of the landowner's income and that of the tenant-peasant differ significantly when the land is operated under different tenure arrangements. Assume that the net income from farming one unit of land, x, is a random variable with a distribution, f(x).' Further assume that f(x) can be fully described by its mean (Ix) and variance (trx2). Given f(x), table I summarizes the means and variances of the landlord's income and those of the tenant when the land is operated under several common tenure arrangements. Most of the results are familiar, so it is only necessary to briefly review them. Under the owner-operator system, the owner bears the risk of income variations.2 Under the fixed rent arrangement, the landowner is assured of a fixed nominal income and the tenant bears all the risk.3 Under the crop-share arrangement, the landlord and the tenant split the risk of income variations in proportion to their respective shares of income.4 The fixed rent contract with escape clause is perhaps less familiar than the other arrangements. The purpose of the escape clause is to permit the