[1].The land law effective in Taiwan in the postwar period but before the land reform was the same as that promulgated by the Chinese National Government in June 30,1930,enforced March 1,1936,and amended April 29,1946.However,the Chinese land law governing private farm lands had been basically the same long before 1930.The main revisions in 1930 and 1946 involved the addition of discriminatory provisions against aliens and precautionary articles for future national interest.Thus,there was no substantial transformation in the system of property under the National Government.All articles cited hereafter are in Chen,Land Reform in Taiwan,pp.133-90.The Chinese version of these articles is in China Land Bureau,Rules and Regulations of Land Administration（China:National Government,1947）.
[2].JCRR,"Annual Reports,"p.8.
[3].We may regard a right as a limited authority to make decisions about resources;that decision authority usually has a positive present value.
[4].To avoid ambiguities,we may simply regard"labor"and"capital"as physical input entities.
[5].Certain other uses or rights in land were being denied.For example,"minerals attached to any land shall not become private property,even if private ownership of the said land has been duly acquired"（Art.15）.See also Art.12 and 13.
[6].Transfers to aliens were restricted（Arts.17-24）.
[7].See Arts.33 and 107.
[8].Chen,Records of Taiwan Land Reform,pp.17-18.
[9].See Ronald H.Coase,"The Problem of Social Cost,"The Journal of Law and Economics（October,1960）；and Armen A.Alchian,"Some Economics of Property Rights,"mimeographed（Santa Monica:The Rand Corporation,1963）.
2.The Theory of Share Tenancy
In this chapter a theory of resource allocation under share contracts is derived.The analysis is based on the premise of wealth maximization subject to the constraints of private property rights in a free market,that is,one without rental restriction.Under exclusive and transferable resource rights,each contracting party is free to accept or reject the negotiated terms of a share contract.Unless otherwise indicated,a zero cost of contracting is assumed.[1]
A.The Solution Defined
In figure 1,the abscissa of the vertical supply curve,-5,indicates the total area of land belonging to a landlord.Let h denote the land area held by a tenant,and q be the product.The marginal product of land,
,diminishes as h increases,holding the farming inputs of one tenant（or one tenant family）constant.Suppose the rent charged by the landowner is 60 percent of the annual yield,that is,r=0.6.A marginal contract rent curve,
r,is at 60 percent of
.The vertical distance between
and
r is the marginal tenant income,
（1-r）,defined as the change in tenant income with respect to a change in land area used by the tenant.The shaded area between
and
r represents the total farming income received by the tenant,and the area below
r represents the total rent collected by the landowner.If the tenant's income is as high as or higher than his alternative earning,he will stay in farming and will use all the land available to him on this farm as long as the marginal productivity of land is greater than zero,with all farming inputs other than land held constant.To maximize wealth,the landowner will raise the rental percentage-thus the
r curve-until the tenant's income from farming equals his alternative earning.
However,the rental percentage is not the only variable which the landowner can adjust to maximize his wealth.The landlord will not allow one tenant to cultivate all the land he owns if parceling his land to several tenants will result in a higher total rent.This is illustrated in figure 2.In this figure,vertical lines T1,T2,T3……are dividing lines of plots of land to the first,second,and third tenant respectively.As the number of tenants cultivating the available land increases,the marginal product of land shifts upward relative to the situation where there is only one tenant.
Assume for the moment that the rental percentage is the same for all tenants.The curves
,
……are the marginal productivities of land for each tenant,and
r,
r,……are the respective marginal contract rent curves for each tenant.[2] The income for each tenant is represented by the area between the respective
and
r curves for the tenant.
To maximize his wealth,the landowner will maximize the differ-ence between the integral of the marginal productivities of land and the integral of the tenants'incomes,which is represented by the shaded area in figure 2.That is,the landowner will make the integral of marginal contract rents a maximum.This implies that the income of each tenant will not be higher than his alternative earning.
As the area of land assigned to each tenant becomes smaller,however,the rental percentage the landlord charges must be lower for the tenant to obtain his alternative earning,which calls for a decrease in marginal contract rent,
r,in order to prevent the tenant from giving up the lease.This decrease in
r will lead to a lower rent received from each tenant,and if the land size per tenant continues to decrease,the rental percentage will eventually become so low that the total rent from the land will decline.The solution is thus well defined:Maximization of the landowner's wealth,given his total landholdings and the cost of tenant inputs,requires the simultaneous determination of the land size per tenant and the rental percentage.In other words,with private property rights over land and tenant input resources,the terms in a share contract mutually agreed upon by the landowner and the tenant will include the rental percentage and the ratio of nonland to land input that are consistent with equilibrium.