Interest rate discrimination, tenancy and cost sharing

Saha, Bibhas and Sharma, Tridib (2011) Interest rate discrimination, tenancy and cost sharing. Indian Growth and Development Review, 4 (2). pp. 153-165. ISSN 1753-8254

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Purpose: The aim of this paper is to develop a theory of sharecropping with cost sharing after allowing for an explicit role of a creditor. In the tenancy literature, the prevalence of sharecropping has remained an important issue. While most contributions have focussed only on output sharing, very few have studied the issue of cost sharing. Besides, the existing models have considered interactions only between a landowner and a tenant. The purpose of this paper is to extend this setup to a third player – creditor. Design/methodology/approach: The authors adopt a static contract approach with full information and no uncertainty and model possible credit‐cum‐tenancy arrangements among a money‐lender, a landowner and a tenant under the restrictions that the money‐lender cannot charge a lump‐sum fee and the input choices are left with the tenant. Findings: It is shown that all Pareto optimal arrangements between a creditor, a landowner and a tenant must involve interest rate discrimination between the tenant and the landowner and a share tenancy with cost sharing, or a fixed rent tenancy with cost sharing, or a mixture of the two. None of the polar contracts – wage or rent – is possible. Lending schemes that feature credit rationing or credit delegation can implement some Pareto efficient outcomes. Originality/value: The model developed in the paper presents a framework for studying various tripartite arrangements observed in rural economies of developing countries. Also, it provides a benchmark for studying contracts under asymmetric information and uncertainty.

Item Type: Article
Faculty \ School: Faculty of Social Sciences > School of Economics
Depositing User: Julie Frith
Date Deposited: 09 Feb 2012 11:03
Last Modified: 15 Dec 2022 01:26
DOI: 10.1108/17538251111172050

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