To illustrate,return momentarily to figure 3.In a fixed-rent contract,the landowner will be able to charge a rent equal to the maximum of（q-f）/h per acre,or ar,and the area rented by the tenant will again be T1,where the rent per acre equals the marginal product of land.Given q/h and f/h as shown,if an area larger than T1is rented,the rental price per acre will be higher than the marginal product of land.Conversely,if an area smaller than T1is rented,the tenant's total income from farming will be less than his alternative earning.Thus,under fixed rent,the land size per farm and the rental annuity received by the landowner will be exactly the same as under share tenancy.[1] Furthermore,if the same crops are to be planted on the same grade of land,having the same production function,the tenant under fixed rent will have to commit the same f/h to survive competition.As in sharecropping,if one tenant does not possess the necessary amount of inputs,he may acquire them through various means or rent a farm which requires less farming inputs.
Let us also press the question:Under share tenancy,what criteria will the contracting parties use in arriving at the equi-librium land size and rental percentage for each tenant?Clearly,the most efficient type of crops to be planted on the given land must be chosen,and the tenant inputs required must be considered-all ex ante decisions with some degree of uncertainty.Surely,erroneous decisions may occur owing to wrong expectations by either party to the contract.This will result in the tenant land size or the rental percentage differing from wealth maximization.It is equally clear,however,that some simple rules exist in the market which the contracting parties will follow.Given land of a particular grade,there exist,at prevailing market prices of land and other factors of production,certain combinations of tenant input requirements,rental percentages,and tenant land sizes.
Indeed,given freely alienable（marketable）land rights under private ownership,a landowner does not have to know the details of farming himself.Competition for resource ownerships will induce efficient contracts.If a less valuable crop is planted by the tenant,if the rental percentage is too low,the land size per tenant too large,or the tenant inputs required too little,the rental annuity as a return to land for the landowner will be at a rate lower than the rate of interest.In this situation,the landowner will either make the proper adjustments,lease the land to a different tenant,choose a different contractual arrangement,or sell his landownership outright.On the other hand,if the contractual agreements are such that the tenant is receiving a share lower than his alternative earning,other landowners will bid his services away,or the tenant may turn to wage labor.
As with competition among landowners,competition among tenants will insure that the contracted amount of tenant inputs is committed.Indeed,by checking the output alone the landowner will know whether the contracted terms are respected by the tenant and will decide whether the share contract should be continued.In practice,however,the transactions are frequently handled by hired agents who specialize in approximating the true yield.And in spite of numerous claims by reformers and novelists that tenants could make no decision and therefore were exploited,it is refreshing to point out that,in China at least,share contracting was rather polite:
As soon as the grain is threshed the tenant invites the landlord to a feast,after which the grain is divided and the tenant delivers the landlord's share to his home.After it is properly delivered the landlord gives the tenant a feast.If the landlord wishes to dismiss the tenant he does so at this time.If the tenant wishes to leave,he takes the sails from the windmill just before the landlord comes to the tenant's feast as a sign to the landlord of his intentions.[2]
Our analysis thus far has primarily been confined to a condition of zero cost of contracting.This assumption is dropped in chapter 4,in which we discuss problems of transaction cost and the characteristics of lease stipulations.But let us first trace the development of the theory of share tenancy,and perform tests of implications for alternative theories.
[1].For still another exposition on this,see chapter 3,section C.
[2].John Lossing Buck.Chinese Farm Economy（Chicago:University of Chicago Press,1930）,pp.148-49.
3.Traditional Views of Sharecropping and Tests of Alternative Hypotheses
Perhaps the theoretical results reached in the preceding chapter would have been obtained by earlier writers had it not been for some illusory views fostered by tradition.In particular,there is the analogy frequently drawn between share rent and an excise tax.Since under sharecropping a portion of every output unit produced is taken as rent,it yields the impression of being similar to an ad valorem excise tax-where part of every unit produced is"taxed"by the landowner（government）.The distribution of output is not the same,it is believed,as with fixed rent or owner cultivation-where the tiller obtains the entire incremental product.Share tenancy,therefore,is said to result in less intensive（and less efficient）farming because the tenant's incentive to work or invest in land is reduced.[1]
It is not difficult to show that the application of the analysis of a tax to share tenancy（hereafter called the"tax-equivalent"approach）is erroneous.The hypotheses stemming therefrom fail on several counts.In the tax-equivalent approach,the writers generally fail to realize that the percentage shares and area rented under share tenancy are not mysteriously"fixed"but are competitively determined in the market.Furthermore,these writers fail to specify the nature of the system of land ownership upon which their hypotheses are constructed.Let me clarify.