For any resource,a number of individuals compete for ownership.Each potential buyer or user possesses some knowledge not only of alternative uses of the resource,but also of different transaction costs associated with different arrangements by which the resource may enter into production.Assume away information problems that may exist in competitive trading in the market place;[6] the resource will find that owner whose use of the resource yields the highest value.Competition for and transferability of the ownership right in the marketplace thus perform two main functions for contracting.First,competition conglomerates knowledge from all potential owners-the knowledge of alternative contractual arrangements and uses of the resource;and transferability of property rights ensures that the most valuable knowledge will be utilized.Second,competition among potential contract participants and a resource owner's ability to transfer the right to use his resource reduce the cost of enforcing the stipu-lated terms in a contract.This is because competing parties will stand by to offer or accept similar terms.In sum,competition in the marketplace reduces the costs of finding and pursuing the most valuable option in which a resource may be contracted for production.While transaction cost determines,it is also determined.
In the absence of transaction costs,that state of resource allocation under which it is no longer possible to reallocate resources to benefit one individual without another's losing（that is,the Pareto condition）implies the familiar set of marginal equali-ties in resource use.With transaction costs included,however,resource allocation in conformity with the Pareto condition need not satisfy the same set of marginal equalities.[7] Although it is difficult,if not impossible,to separate one type of transaction cost from another,it may nonetheless be useful to distinguish two types of marginal inequalities generated by the presence of transaction costs.
The first may be regarded as being among firms;that is,the same factor input yields different marginal productivities in different firms or in different uses.For example,with transaction costs there may not exist a uniform factor price in the market,and the buyer's price may differ from the seller's price.These price differentials will lead to different marginal productivities of the same factor input in different firms.To the extent that transaction costs are so high as to prohibit transfers of resource rights,the resource value can only be expressed in terms of a nonpecuniary measure.
A second type of marginal inequality may be regarded as being within the firm;that is,the marginal product of a factor employed by a firm may diverge from its marginal factor cost owing to transaction costs.Let me clarify this.Consider a contract involving a lump-sum payment for the use of a resource,wherein the quantity of the resource is not stipulated at all.For example,a landowner,in letting his scarce water resource to a tenant,may charge only a flat fee and allow the tenant to use the quantity of water freely.This arrangement is chosen because the transaction or enforcement cost of quantification（through metering or other devices）is so high（owing to,say,the physical attributes of water）as to make alternative arrangements inefficient.[8] Under this form of contractual payment,the water resource will be used by the tenant until its marginal product is zero,even though the marginal factor cost of the water is positive.But if the marginal inequality of resource use is due to different costs of contracting,it does not imply inefficient resource use.Indeed,if the gain from choosing another contractual arrangement（e.g.,a contract with a unit price charged on water）had been greater than the cost of quantifying the use of water,some metering device would have been adopted and the contract with the lump-sum payment abandoned.[9]
Efficient allocation,therefore,requires that each resource be used in the highest-valued option subject to the added constraint of transaction costs.The option value may be measured in utility or in wealth,depending on the existence of market prices.But since transaction costs may also depend on alternative legal arrangements,the"highest-valued option"is not always clear.I shall try to say more on this in the concluding section of this chapter.
The existence of transaction costs appears to have at least three predictable effects.First,they tend to reduce the volume of transactions,thus impairing economic specialization in production and the employment of resources.Second,they may affect marginal equalities（and intensities）of resource use.And third,they will affect the choice of contractual arrangements.The last is our main concern here.
A.The Choice of Contracts in Agriculture
Consider the three main forms of contracts in agriculture;namely,a fixed-rent contract（rent per acre stated in cash or in crop）,a share contract,and a wage contract.Under private property rights,the contracting parties are free to choose among these forms.The observed patterns of contractual choices vary from place to place.For example,share contracts were more frequent than fixed rents in Taiwan and Southeast Asia before the agrarian reforms;in China fixed rents were more frequent than share rents in the 1930s;in Japan,fixed rents predominated;and in general,wage contracts（farm hands）have been infrequent,oc-curing in about 1 to 5 percent of the farming households in various localities.[10] Why do the patterns of contractual choices differ?What determines the choice of contracts?