Interlinked Contracts: An Empirical Study

This study investigates contractual relations between farmers and sugar mills in Japanese colonial Taiwan. Our investigation is based on a model of interlinked contracts that is adapted from Gangopadhyay and Sengupta (1998). The validity of our model's predictions is verified by analysing a dataset consisting of contracts between Taiwan's cane farmers and sugar mills. Our data suggest that the contractual relationship is consistent with a scenario in which the interest rates charged by sugar mills on cash loans to farmers are set in order to prevent the diversion of funds to other uses.