Every transaction involves a contract.The transactions conducted in the marketplace entail outright or partial transfers of property rights among individual contracting parties.These transfers may be negotiated through many different contractual arrangements.
For generations economists and land tenure writers have sought to rank the relative efficiency of resource use under different leasing arrangements.But their inquiries were undertaken without explicit reference to the property right constraint involved.And in many instances,the characteristics of various lease contracts had not been carefully examined.Different contractual arrangements do not imply different efficiencies of resource allocation as long as property rights are exclusive and transferable.The characteristics of lease contracts presented above also confirm this statement.
In this chapter I have asked:Why are different contractual arrangements chosen under the same system of private property rights?To answer this question I have introduced transaction costs and risks.The attempt to formulate a choice-theoretic approach to explain the observed contractual behavior in agri-culture has perhaps raised more questions than it has answered.And I have been unable to piece together fragments of analysis into a formal theory:the problems in the theory of choice involving transaction costs and risks are still formidable.
Although the presence of transaction costs or risks may result in different intensities of resource use,as was noted earlier in this chapter,available data do not reveal notable differences in farming intensities for various leasing arrangements under private property rights.[1] The reasoning is as follows.The main forms of tenure arrangements considered thus far include owner cultivation,wage contracts,fixed rents,and share contracts.For these arrangements,economic theory implies a tendency toward the same set of marginal equalities of resource use even if transaction costs exist.To obtain a notable tendency toward marginal inequalities,transaction costs would have to be so high as to yield,for example,the choice of a contract with a lump-sum charge and without quantifying and pricing resource units.Lump-sum contracts,however,have not been important in Asian agriculture and can,therefore,be ignored.Instead,the effects of transaction costs and risks are revealed mainly in the observed choice of contractual arrangements and,less notably,the risk premiums distributed among the contracting parties.
Among some related problems that I have explicitly avoided,the following are significant.First,with respect to risk aversion,a more general analysis would include all risky choices,not contractual choice alone.The analysis would be less difficult if transaction costs were not involved.Second,with respect to transaction costs,a more general analysis would derive some specific and well-behaved cost function of transactions.This step is essential to the development of a model of general equilibrium including transaction costs.
Still other problems I have avoided implicitly.In particular,some level of law enforcement by legal authorities is taken for granted.One may well ask:What will happen to the choice of contracts if the government changes its enforcement efforts?To what extent will these efforts be consistent with the Pareto condition?What set of legal institutions is consistent with the operation of the marketplace?With these questions unanswered,the conditions defining efficiency with transaction costs are not all clear.Let me explain.
In production,cost minimization requires not only the fulfillment of the familiar set of marginal equalities,but also the choice of the lowest-cost production method available.In transactions,one relevant consideration is the cost of alternative contractual arrangements,which I have discussed at some length.One might think that,as a cost constraint,efficiency will be attained when,other things equal,the set of arrangements with the lowest transaction cost is chosen.But transaction costs also depend on alternative legal arrangements.For example,the varying effectiveness of law enforcement,or the varying corruptibility of courts,will affect the costs of transactions in the marketplace.Given the existing legal institutions,I have attempted to explain the observed contractual arrangements.But insofar as I have ignored the choice and development of the legal institutions,the Pareto condition with transaction costs is ambiguous.
I have also not explored the contractual behavior associated with different property right constraints.Various restrictions on the transfer of property rights,or various methods of attenuating the right of a resource owner to obtain income from his resource,will affect the leasing arrangements as well as resource allocation.In the remaining chapters I analyze one important constraint,namely,the legal limitation on the landowner's rental income to a maximum percentage of the annual yield.
[1].One exception is that we find that housing assets in tenant farms were generally of lower value than in owner farms（National Government,Statistical Analysis,pp.100-1）.It may be because housing is also a consumption item and tenants were typically poorer.
5.Transfer Effects of Rental Share Restriction:Hypothesis and Evidence of Offsetting Contractual Rearrangements