Eviction threats and investment incentives

We show that the effect of eviction threats on unobservable investment effort can be positive. Wedemonstrate this apparently counter-intuitive result in a model of tenancy where investment by atenant in the current period raises the chances of doing well in the next period, and thereforeretaining the job in the period after next period. If the tenant earns rents, the landlord can partlysubstitute eviction threats for the crop share as an incentive device. This makes it more attractive forhim to elicit investment effort. However, there is a direct negative effect of eviction threats on thetenant’s discount factor. We find conditions under which the former effect dominates and evictionthreats can increase investment incentives.[...]