A Correction and Prima Facie Test of the Canonical Theory of Share Tenancy

We show that Stiglitz’s (1974) classic principal-agency theory of share tenancy does not imply, as commonly supposed, that the incidence of share tenancy increases with the tenant’s degree of risk aversion nor that share contracts are superior to fixed-lease contracts for risk averse farmers. When the model is parameterized based on previous studies of Philippine agriculture, it predicts that fixed-lease contracts will be chosen when the farmers have slight or severe risk aversion and share contracts will be chosen for moderately risk averse farmers, albeit with tenant shares of 80% or higher. In contrast, the highest observed sharing rates in the study area were in the neighborhood of 2/3, with most farmers contracted on 50:50 sharing arrangements. We conclude that the riskaversion vs. moral hazard theory is incomplete. Rent contracts must have additional disadvantages and/or share tenancy additional benefits that are not accounted for by static principal-agency theory.