the contract, i.e. the amount of effort exerted, will always be higher under operator-ownership of the land than under tenant-landlord relationship.<sup>3 8</sup> This would imply that redistribution of land from the landlord to the tenant - or any other measure (e.g. increased off-farm opportunities) that would increase the tenant's reservation utility - would be associated with an increase in aggregate productivity. Still, while such a redistribution could increase the aggregate utility of both parties (thus making compensation of the landlord a theoretical possibility), a voluntary market-based transfer of land from the landlord to the farmer is not feasible. The intuition is simple - since a credit-based land purchase does not enhance the tenants' wealth, the limited liability constraint will still be applicable and the debt overhang incurred by the cultivator to purchase the land will reduce the incentive to apply effort instead of just defaulting on the loan. However, a non-market transfer of land from landlords to farmers could be associated with an increase in overall productivity as well as aggregate welfare.

Insights on the relationship between liquid assets and contractual parameters are provided by Laffont and Matoussi (1994). Their results suggest that direct dependence of the optimal choice of contract on the working capital available to both landlord and tenant may account for the coexistence of a variety of contracts in the same environment among parties with roughly similar risk aversion but different endowments of working capital.<sup>39</sup> The positive relation between the crop share and the tenant's working capital endowment which theory would lead one to expect even with perfect monitoring of effort is indeed observed in the Tunisian data used. Output is shown to increases significantly with tenants' wealth for all contract types as well as for share contracts but tenant wealth has no effect if only fixed rent contracts are considered. Similarly, the wealth of the landlord has, as expected, a negative effect on the tenant's share and a positive effect on production under the share contract but none in other forms of contractual arrangements. Working capital thus appears to be a significant explanation of the type of contract chosen and the production gains achieved on a given plot.

The importance of potential tenants' asset endowment is emphasized by evidence from India which indicates that, due to wealth constraints, a large number of potential tenants is actually rationed out of the tenancy market (Shaban 1991). In this context, both the smallest and the largest landholders rent their land to middle farmers who are neither capital-constrained nor suffering from the disadvantage associated with the need to supervise hired labor. This illustrates that the ability of the land rental market to bring

> 1 Sadoulet et al. (1997 and 1994) observe that close kin provide insurance to their tenants and are therefore able to avoid the inefficiency of the share contract.

> " The scope for other benefits from a more egalitarian distribution of land ownership that are not directly related to agricultural productivity is illustrated by Banerjee et al. 1997.

> " If risk were a major factor in choosing the optimal type of contract, one would observe significant variation in crop shares according to the riskiness of the crops grown on particular plots. This is, however, not observed empirically.

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