ec 307 lt lecture 2 - land

8/3/2019 EC 307 LT Lecture 2 - Land

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Land, Agricultural Labor & LandReform

EC 307 –

Development Economics

LT 2012

Lecture 2

Greg Fischer

17 January 2011

70% of the poor world relies on agriculture.

How to help these people technologicallyand economically etc.how to provide them with information,credits etc.



Agriculture & Land Reform


• Remain enormously important in world – Close to half of world’s population works in agriculture

– 50% in China; 57% in India

– And most of the world’s poor

• Canonical example of missing markets

EC307: Lecture 2 1

Why are we are talking about agricultureand farms





• Introduction to agricultural markets and labor supply

• Critically assess land reform

• Develop three analytical tools: – Basic theory for problems of imperfect information:

unobserved actions

– Fixed effects

– Differences-in-differences

EC307: Lecture 2 2

Goals for this week

actions under the contract are not observable.





1. Puzzles in the efficiency of land use2. Incentive problems: A simple model of

sharecropping

3. The cases for land redistribution or tenancyreform

4. Testing the effectiveness of one reform

EC307: Lecture 2 3

Outline for today






sharecropping



EC307: Lecture 2 4

Outline for today





• Technology with fixed costs (bullocks, tractors,etc.)

• Larger farms have better access to capital

• Larger farms have better access to “politicalinputs”

• Better farmers may accumulate more land

EC307: Lecture 2 5

There are many reasons to think large farmsshould be more productive than small

Large farms might be more productive than smaller ones: High fixed costs-tractors, Buying fertilizers in bulk for huge lands,

easier access to credits, more bargaining power in selling powers, more probable in investing in learning new techniques

(spread that know how over a large area)

gains of trade


http://slidepdf.com/reader/full/ec-307-lt-lecture-2-land 7/40 Agriculture & Land Reform Agriculture & Land Reform

• Variance in land quality• Rental markets in some capital goods

• Slow pace of technological change: perhaps skill

not that important

EC307: Lecture 2 6

Despite mitigating factors

These factors still persistCannot find evidence of positive productivity-

size relationship in the data

It’s not from a lack of looking

, but…

buying a tractor and rentingit to many farmers

watch this part in lecture


http://slidepdf.com/reader/full/ec-307-lt-lecture-2-land 8/40 Agriculture & Land Reform Agriculture & Land ReformEC307: Lecture 2 7

compare productivity of small to large farms: small farms are more productive..50%, 175%...we are overlooking at the agencyproblems...how contract delegates responsibilities and rewards to concerned signees of the contract..workers might not have thesame incentives thus, motivation like the owner farmer



• Why might we see decreasing returns?

Agency problems

• Large farms cultivated by hired labor – Few incentives to work hard

• Small farms are typically owner-cultivated

EC307: Lecture 2 8

So what is going on?

Could land redistribution improve productivity?these things would have to be true:the new land will have higher marginal product...there is a good credit market...there is a need for clarity ofownership..they have to be willing to hire more labor..decreasing MP of labor...but again it comes back to the originalproblem..it should be the case that the buyers will work in the farm with the same incentives as before



What do you think?

EC307: Lecture 2 9

Why can’t owners give right incentives toworkers?

cant observe how much effort they put, difficult to match fixed wages with the amount of work they do




sharecropping



EC307: Lecture 2 10

Outline for today



• Tenant farms land and applies effort e – Unobservable to landlord

• Effort is costly to the tenant:

• Two possible outcomes – With probability e: Output is H

– With probability 1-e: Output is 0

• Tenant can choose to work elsewhere and

obtain

EC307: Lecture 2 11

Incentive Problems: A simple model of sharecropping

2

2

1ce

w

the extra effort becomes costlier as oneputs more effort



• Maximize:

• Solution:

EC307: Lecture 2 12

What is the optimal effort level?

212(1 )0eH e ce

*

0 H ce

H e

c

If all I care about is output, e = 1

Comparative statics: how the variable of interest changes by the parameters of the modelWhen output increases, effort goes up..if cost of effort increases, effort decreses



• Effort unobservable• Contract specifies payment to tenant in both

states of world. Write as (h,l)

–

–

• Some contract types

– Wage contract: – Fixed rent:

– Sharecropping:

EC307: Lecture 2 13

Contracts take the following form

h H

l

if output is

if output is 0

( , )w w( , ) H r r

( , 0) H in exchange for working on the land, thefarmer gets some amount of the output



• Work sequentially, given h and l, what is tenant’seffort choice?

• Tenant wants to maximize income minus cost of

effort:

• So what is the tenant’s optimal effort choice?

This gives us the incentive compatibility constraint

EC307: Lecture 2 14

Solve for optimal contract without worryingabout limited liability or outside option

21(1 )

2eh e l ce

*

T

h le

c



• We want these two efforts level to be equal• The tenant pays r and receives all the income in

every state of the world

• This is a fixed rent contract

• It also means tenant bears all the risk

EC307: Lecture 2 15

What contract induces the tenant to choosethe optimal effort level?

*

T h le

c

* H ec



Agriculture & Land Reform Agriculture & Land Reform

• So what does?• Landlord needs to convince tenant to work

• Tenant must receive at least the utility of his

outside option• In math:

• This is the participation constraint

EC307: Lecture 2 16

Does this pin down the contract (h,l)?

w

* * *21(1 )

2e h e l ce w




• Limited liability• Risk aversion

• Two-sided effort

EC307: Lecture 2 17

Consider modifications moving towardsreality

eg. more investments to complementlabor

but the same optimality condition doesnt hold for this cuslandlord doesnt have any return to extra investment




• Imagine tenant cannot receive a negativepayment

• What will l be?

• What will e be?

EC307: Lecture 2 18

Limited liability constrains what tenant canbe paid/pay in bad states of the world

Zero: HW




• Rewriting

EC307: Lecture 2 19

Return to landlord’s maximization problem

( , )max ( ) (1 )(0 )

. .

h l e H h e l

s t e

e

solves tenant's max. problem (IC)

satisfies tenant's participation cnst. (PC/IR)

2

max [ ]

1. . 2

2

h

h H h

ch h

s t h c w h wcc c

h l he

c c




• How does effort compare to the case withoutlimited liability?

• Why is effort lower?

• What is the effect of increasing the outsideoption?

EC307: Lecture 2 20

Interpreting these results




• With risk neutrality, the optimal contract forcesthe tenant to bear all the risk

• If he’s risk averse, may want some insurance

from the landlord

• Some intuition:

– What do you think happens?

• Setting up the problem...

EC307: Lecture 2 21

What if the tenant is risk averse?




• What are you trying to maximize?• What tools do you have at your disposal

• What constraints do you have to satisfy

– Participation – Incentive compatibility

EC307: Lecture 2 22

Setting up the contracting problem with risk aversion





sharecropping



EC307: Lecture 2 23

Outline for today




• Return to inverse relationship between land sizeand productivity

• Potential explanations:

– Land quality

– Farmer characteristics

– Incentive problems

– All of the above?

EC307: Lecture 2 24

How important are incentive problems?




• Use ICRISAT data – Very detailed panel from Indian villages

• Compare inputs and productivity on both types

EC307: Lecture 2 25

Binswanger and Rosenzweig try to separate

ij ij i ij R

iji jwhere is farmer 's outcome on plot

ij R indicates if plot is rented

i is an observed but fixed individual effect

i ij R Suppose worried that is correlated with

B is -ve if farmers are lessproductive in rented lands

but good farmers

might buy the land towork on

W t f b d i di id l




• Some individuals cultivate both owner-operatedand rented plots

• Control for individual fixed effects• For example, for farmers that cultivate two plots,

can run regression:

• … and the fixed effect is gone?

EC307: Lecture 2 26

We can account for unobserved individualcharacteristics

ij ij i ij R

1 2 1 2 1 2i i i i i i R R cus its the same farmer

Bi d R i fi d t




• What does this suggest?

• What could still be wrong?

• Note: it’s not enough to say “errors could still becorrelated with RHS variables”

• Need a plausible story

EC307: Lecture 2 27

Binswanger and Rosenzweig find strongnegative

1 2 1 2 1 2i i i i i i R R

plots of land rented might be (is) worse than the oneowned..if we avoid this, we will overestimate thedisincentive to work on the rented land

Sh b (1987) d t b t l




• Finds individuals work 40% more on their ownland (controlling for land size)

• Productivity 15% to 30% higher on own land

EC307: Lecture 2 28

Shaban (1987) uses same data but alsocontrols for plot quality

Suggests incentive problems are key source of

inverse size-productivity relationship





sharecropping



EC307: Lecture 2 29

Outline for today




• Prominent in 1960s and 1970s as mechanismfor achieving “redistribution and growth”

• Comes in two flavors

– Land redistribution

– Tenancy reform

EC307: Lecture 2 30

Land reform

E i t t d t thi k di t ib ti




1. Land cannot flee to Switzerland and cannothide

– But formal ownership is not effective control

2. Fewer distortions

– What happens if tax income?

– But may be politically very costly

3. Can we assess effect of land redistribution per

se? – What is the effect of wealth shock on recipients?

EC307: Lecture 2 31

Economists tend to think redistributingmoney is better, so why redistribute land?

work less hard orhide that income





sharecropping



EC307: Lecture 2 32

Outline for today




• Few studies of efficiency effects of large-scaleproperty rights reforms

– Tend to be accompanied by social unrest

• Banerjee, Gertler, Ghatak (2002) study tenancy

reform in West Bengal

– Not redistribution

– Improvement in tenants’ rights

– If registered, cannot be evicted if pay 25% of output tolandlord

EC307: Lecture 2 33

Does land reform work?

tenants do everything to reap benefits in short term so if we can makethem feel they can own it for longer term, they might invest on theland for better

Consider two channels




• Tenant & landlord negotiate over share• Before reform, what happens if disagree?

• What happens to tenant share of income?

• Is this good or bad for productivity?

EC307: Lecture 2 34

Consider two channelsFirst: Improved bargaining power

Consider two channels




• Why might security of tenure have positiveproductivity effect?

– Consider long-term investments

• Why might it have a negative effect?

– What are the incentives for effort?

EC307: Lecture 2 35

Consider two channelsSecond: Security of tenure

So how do you answer the question?

less worried aboutconsistency of returnslandlord has less incentive toinvest now

The effect of reform:



Agriculture & Land Reform Agriculture & Land ReformEC307: Lecture 2 36

The effect of reform:Looking at simple differences across time

Before After Difference

West

Bengal 1308 1650 342

after: 1650difference: 342This difference doesntsay anything about theeffect of the reform.There could be otherthings happening at

that time..Greenrevolution in India etc.

Consider one part of their paper:




• Bangladesh – Neighboring country

– Similar agricultural characteristics

– No reform

EC307: Lecture 2 37

Consider one part of their paper:West Bengal vs. Bangladesh



Agriculture & Land Reform Agriculture & Land ReformEC307: Lecture 2 38

Simple difference across countries

AfterReform

West

Bengal 1650

Bangladesh 1562

Difference 88



Difference-in-Difference Estimator

Before After Difference

West

Bengal 1308 1650 342

Bangladesh 1297 1562 265

Difference 11 88 77difference is 80..there will moredifferences btwn characteristics ofland and land productivity betwnbangladesh and west bengal..

difference 11 88 77

ec 307 lt lecture 2 - land

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