Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

ECON 313 > Land > Flashcards

Land Flashcards

1
Q

Principal Agent Theory

A
  • Only landlord can choose the type of contract
  • Perfect monitoring is not possible (too costly and other things to do)
  • Therefore imperfect monitoring: cannot contract on cultivator’s effort
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Cultivator’s revenue?

A

αf(e)+w

  • where e is effort
  • f(e) is harvest (function of effort)
    (decreasing returns to effort, so f’>0 (growth of harvest is greater than 0)
  • Now, harvest depends solely on effort e
  • α: share of the harvest kept by the cultivator
    w: wage obtained by the cultivator
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Application of formula: examples of fixed wage, sharecropping and fixed rent

A

If fixed wage:
- α=0, w>0 (share kept by the cultivator is 0, wage is greater than 0)

If sharecropping:
- 0<0

Cultivator keeps all the harvest, but pays landlord a fixed rent (wage is less than 0, but share kept is 100%)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Cultivators profit with cost of effort?

A

c(e)=cost of effort:

  • c’>0 (cost increases with more than 0)
  • and c’‘>0: rate of increase in cost is more than 0
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Conclusion of C’s profit?

A

C’s profit is: αf(e)+w-c(e)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

maxe [αf(e)+w-c(e)] ?

A

 first derivatives must be equal to zero
 αf’(e)=c’(e)
 α=c’(e)/f’(e)
- (share kept by the cultivator = growth in cost of effort and growth in harvest)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Math: how to maximize profit?

What happens if (e) effort goes up?

A

If e (effort) goes up:

c’(e) ↑
f’(e) ↓ , so 1/ f’(e) ↑
So c’(e)/f’(e) ↑
So α ↑

  • increase in cost (goes up)
  • decrease in harvest, so 1/growth in harvest goes up?
  • so c’(e)/f’(e) goes up
  • so share of harvest kept by the cultivator goes up

Therefore: α ↑ means e ↑
Effort increases if α increases
Landlord should increase α to increase e

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Effort increases if ….

What should the landlord do?

A

Effort increases if α (share kept by the cultivator) increases
Landlord should increase α (share kept by the cultivator) to increase e (effort)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Marginal benefit

Marginal cost

A

MB: α * increase in production due to increase in effort

MC: increase in cost due to increase in effort

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Contracts and incentives: intuition?

A
  • Marginal benefit decreases after a while (decreasing returns to effort)
  • Marginal cost increases
  • At some point, marginal benefit < marginal cost
  • I stop where marginal benefit = marginal cost
  • If α ↑, marginal benefit ↑
    (It becomes more interesting to exert effort)

THUS: c has more incentive to provide maximum effort if he keeps more of the harvest (because MB is higher)
- If he only keeps 50% of the fruits of his effort (Harvest), then he should keep his effort lower

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Graphic: owner??

Where to maximise economic surplus?

A

Cultivator wants to maximize economic surplus?

= Difference between harvest and cost (e* efficient level of effort)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Graphic: sharecropping?

A

Because efficient level of effort (e*) when sharecropping is lower (because economic surplus is lower)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Landlord’s profit in sharecropping?

A

Distance between αf(e) and f(e) is:

(1- α)f(e) = landlord’s profit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Which one is better?

Fixed rent is clearly better then sharecropping because:

A
  • it maximises economic surplus
  • the landlord can charge a high rent
  • it gives good incentives to cultivator to exert effort
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Studies on sharecropping and omitted variable bias in empirical test in sharecropping?

A
  • Where studies find a negative correlation between harvest and sharecropping. (bs quality
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

3 models of why sharecropping exists

A
  1. Insurance
  2. Double sided incentives
  3. Limited liability
17
Q

Risk aversion?

A

An individual is risk-averse if he/she prefers an amount X for sure, to a lottery with expected value X

18
Q

Example of risk aversion?

A
  • 500 for sure?
  • Or 800 with probability 1/2, 200 with probability 1/2
  • Expected value of lottery
    E(lottery)= 1/2800+1/2200=500
19
Q

Variables in math function of risk aversion?

A

U: utility function
H: high payoff with probability p, L low payoff with probability (1-p)

20
Q

When is an individual risk-averse?

A

U [pH+(1-p)L] > pU (H) + (1-p)U (L)
OR
U(50o) > weighted AVERAGE of utilities of H and L payoffs (on a graph)

21
Q

What’s better in terms of insurance for cultivator…?

A

FIXED WAGE

But sharecropping might be a good compromise between:

  • fixed rent (that provides the most incentives to exert effort)
  • and fixed wage (that provides the most insurance in case of natural disasters)
22
Q

… For landlord?

A

Fixed rent!

23
Q

Model 2: Double-sided incentves

A

Incentives for the landlord too! What if landlord can contribute to the success of the harvest? (Advice, seeds, fertilisers…)

NO incentives for landlord’s effort if fixed rent
MAXIMUM incentives for landlords’ effort if fixed wage

AGAIN: sharecropping a good compromise between incentives for cultivator and incentives for landlord

24
Q

What’s better in terms of insurance for each party…?

A
  • Cultivator: fixed wage
  • Landlord: fixed rent

Again: sharecropping a good compromise (If landlord is actually important in production)

25
Q

Model 3: limited liability

A

Cultivator must keep a certain revenue in case of failure.

He may not be able to pay rent if he gets only 200 (when natural disasters) Impossible to enforce the payment in bad states, hence: limited liability!

26
Q

A way to solve limited liability?

A

Reduce the rent in case of bad outcome
Increase the rent in case of success
This ensures that the cultivator gets more than its subsistence level even in bad states, and can repay…

Iow: sharecropping!!

27
Q

Conclusion?

A

Even if sharecropping might have benefits (insurance, double sided incentives, subsistence level), fixed rent gives more incentives to the cultivator
The extreme form of fixed rent is owner-cultivator

28
Q

Technological reasons for why cultivator do not own its own land?

Show that the historical reasons should not persist…

A
  • C would necessarily organise itself in lots of small plots, causing lower productivity?
  • Yes, because of increasing returns to scale (need heavy investments/lots of capital)
  • No, because they would only organise in co-ops!
  • Yes, because co-ops doesn’t work! (tragedy of the commons (overgrazing) and free riders (fails unless completely altruistic agents)
29
Q
  • But empirical studies show than share-cropping is less productive? That it would be much better if cultivator owned all the land?
A

OVB: small farms could also be of better quality:
Good lands may be fractioned by inheritance disputes (more than bad lands)
Small farmers may sell their bad lands first in case of financial trouble
We would need a randomized experiment…

30
Q

credit market reasons….?
(Imperfect credit markets)
These makes it very hard to change this outcome because…

value of land for buyer is less than value of land for seller

A

If land should belong to its cultivator, then there should be a mechanism through which an exchange would be profitable to both parties..

But because of the collateral needed to obtain credit,
value of land for buyer<value of land for seller

Therefore in imperfect credit markets (where collateral is needed), no exchange is possible

31
Q

Solutions?

A

Land reform!

Tried India’s Land Reforms Act of 1955:

  • Promised land if though sharecropping under certain circumstances.
  • One exception was if landlord wanted to cultivate the land for “personal reasons”
  • Failed completely:
  • Landlord’s exploited the “personal cultivation” exemption to threaten eviction
  • gov provided no support for registration
  • landlords intimidated tentants to not register
32
Q

(Operation Barga)

A

1977: left-wing government:
- closed the loophole
- implemented Operation Barga: a massive and well-publicized village-to-village campaign to register tenants

Results:

  • 50% percentage points increase until 1993
  • Before the reform, 74% of tenants said that their leases were subject to arbitrary termination by the landlord
  • After the reform, 96% reported that evicting registered tenants is difficult or impossible
  • Increased bargaining power translated in better sharecropping contracts for the cultivator

Conclusion: successful land reform
No trade-off between equity and efficiency in this context

  • but can be captured by elites (Mexico)

ECON 313 (8 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions