Industrialization and Compensation for Displaced Farmers

This paper analyzes an environment where a plotof land is currently under agricultural use under tenancy, andboth the landlord and the tenant can invest to enhance agricultural productivity. There is the possibility of converting theland to non-agricultural use. We analyze the incentives of thelandlord and the tenant to invest in the presence of this opportunity, as well as the likelihood of conversion in the presence ofmoral hazard on the part of both landlord and tenant, and thelandlord having unilateral control rights in deciding to convertthe land. We show that the landlord and the tenant both under-invest at the unregulated equilibrium, and there is a tendencytoward over-conversion. We characterize conditions under whicha policy of compensating the tenant in the event of conversioncan mitigate these inefficiencies.[...]