Moral hazard, land fertility and sharecropping in a rural area of the Philippines

Introducing concerns about land fertility for landlords in a Principal-Agent model of sharecropping with moral hazard, we show that the optimal contract under limited commitment reflects a trade-off between production and land quality maintenance. Using data from the Philippines, a model where the leasing out and contract choices are simultaneous is estimated and avoids the selectivity bias of observed contracts. Landlords prefer to use more incentive contracts for more fertile plots and less incentive ones when crop choices induce land overuse. Empirical tests reject the model of pure risk sharing in production and show the interest of taking land quality maintenance into account. (C) 2002 Elsevier Science B.V All rights reserved.