On the Structure of Tenancy contracts: Theory and Evidence fron 19th Century Rural Sicily

In a world with asymmetric information, contractual terms are an important incentive device. This paper studies the effect of crop characteristics on the choice between short-term and long-term tenancy contracts and on the choice between sharecropping and fixed rent contracts when the production process depends on two non-contractibles: effort devoted to current production and effort devoted to plant and soil maintenance. Long-term contracts are effective in providing incentive for non-contractible investment. Since, however, incentive provision is costly because of information rents, long-term contracts will be employed only when maintenance benefits are high enough. The predictions of the theory are tested on a unique data set containing 705 tenancy contracts signed between 1870 and 1880 in the province of Syracuse (Italy). The empirical evidence shows that indeed long term contracts were used if the crops grown had higher maintenance needs. Other comparative static results are derived and tested empirically.