The landowner will furnish[so many catties]of seed,together with[so many pairs]of water buffalo,[so many head]of donkeys,and all essential farming equipment.The dur-able assets are for use purposes only,and shall not be damaged or lost[by the tenant]……and they must be re-turned to the landowner without delay at the termination of the lease.The[aforementioned]rental rate is subject to adjustment according to local customs in a famine year.[4]
The above samples of fixed（crop）rent contracts are the most representative I could find.They are identical to cash rent contracts in all aspects except that in the latter rental payments are stated in monetary units.[5] According to observations collected by the Department of Real Estates,covering twenty-two prov-inces in China,cash rents are generally slightly lower than crop rents.[6] This differential can be explained by landowners'sharing in the product selling cost undertaken by tenants.We may also note that with inflation occurring in 1938,owing to the Sino-Japanese War,beginning in 1937,13.3 percent of cash rents were converted into crop rents and 15.3 percent were converted into share rents.[7] This observation,of course,is consistent with minimizing transaction cost.Under inflation,renegotiation of cash rent contracts becomes more frequent and thus more costly.
The characteristics of fixed-rent contracts are not of special interest except for one feature which we single out to elaborate on here-the frequent inclusion of the provision for rental reduc-tion according to"local customs"in a"famine"year（see samples a and c）,a provision which is absent under an"iron-sheet"rent（see sample b）.Let us call this provision an escape clause for the tenant,the inclusion of which in a fixed-rent contract imposes a risk burden on the landowner.
We may interpret"local customs"as a set of market prices for"famine"adjustments,even though the exact magnitude of the possible reduction of rent is not stated when the contract is signed.The escape clause comes into play only in a year so"bad"that the market considers it to be a"famine."Given a sufficiently large number of fixed-rent contracts which include the escape clause,competition among landowners to keep their tenants will yield certain market rates of rental reduction which each land-owner will follow.Other things being equal,the increased risk burden on the landowner associated with the inclusion of the escape clause implies that a premium will be added to the"fixed"rent over the"iron-sheet."[8]
Although shifting the risk burden by including the escape clause in a fixed-rent contract is not quite the same as the risk dispersion in a share contract,we may imagine the formation of share contracts via the escape clause.Suppose"famine"is defined as occurring when the actual harvest is reduced to a certain percent of the expected mean yield owing to natural causes.The tenant under fixed rent has the option to choose between agreeing to an"iron-sheet"contract or buying an"escape"right by paying an"insurance"premium to the landowner-such that in the event of"famine,"rental payment will be reduced by a certain percentage according to a market rule.
To further the argument:there could exist in the marketplace not just one escape clause as observed,but a wide range of similar clauses each associated with a different level of"famine,"such that the tenant could obtain any or several of them by paying different premiums to the landowner.As such,the risk burden could be dispersed between the contracting parties in an infinite number of ways,each with slightly different arrangements.This hypothetical world would perhaps exist if the costs of negotiating and marketing all the different escape clauses were zero.But with increasing transaction cost associated with additional escape clauses-in particular,the cost of defining different levels of"famine"in the marketplace,and the cost of negotiating the rental reduction for each-the incremental gains of having them may be so small that no further"custom"is developed by the market.Instead,an alternative device chosen is a share contract,under which multiple"escape"provisions for the tenant will be implicit,and within which the rental payment is no longer fixed.[9]
From the above one may deduce two implications with respect to transaction cost and risk aversion.First,I have argued that the transaction cost is higher for share rent than for fixed rent,pending empirical confirmation.Observed contractual arrange-ments in China suggest that the transaction cost for a wide range of escape clauses is higher than for share rent.The reason is that a wide range of escape clauses would allow a greater variety of choice for risk dispersion than a share contract,and yet only one escape clause is observed as available.Thus,the range of contractual choices is constrained by transaction cost.Second,since,as noted earlier,evidence indicates that share rent is slightly higher than fixed rent owing to the added risk burden imposed on the landowner,I conjecture that the landowner's income would be higher than with a share contract if an escape clause were adopted to the effect that the tenant's income variance is reduced to zero.Imaginative as it may seem,we find that such an escape clause exists in the real world,disguised under the name of wage contract.