# **I. Introduction**

In situations where the distribution of land ownership is different from the optimal operational structure, mechanisms—in many cases rental markets—that transfer this factor to its most productive use have a key role in increasing total production and ensuring economic efficiency. Historically, when most of the land was cultivated with traditional technology and nonagricultural labor markets were virtually nonexistent, the majority of such land transactions occurred between large landlords, often absentees, and small tenants with few alternative opportunities, essentially compensating for a skewed distribution of land ownership. The increasing complexity of the agricultural production process implies that imperfections in other markets that are frequent in the rural areas of developing countries will affect the nature and direction of rental contracts. However, with economic development, a number of other disequilibrating factors such as changes in the demographic structure, nonagricultural demand for land, and an array of other reasons for land transactions—from producers’ desire to take advantage of opportunities for off-farm employment and temporary migration to differential agricultural ability—have started to complement, and in many cases substitute for, the “traditional” model of land leasing from large to small landlords (Sadoulet, Murgai, and de Janvry 2001). As a result, land lease markets have become quite active, even in countries such as China and Vietnam where, with a highly egalitarian distribution of land ownership, the traditional model of land leasing would otherwise lead one to expect limited levels of land rental activity and the nature, purpose, and potential effects of such transactions may change significantly in ways that have not yet been fully explored in the literature.

In developing countries, where land is a key productive asset and source of income, it is not only the level of land rental activity but also the level of productive efficiency on the land thus transferred that is of relevance. In fact, economists have long been concerned about the efficiency implications of rental markets with a view towards identifying policy options that, by improving the efficiency of land use, have the potential to make everybody better off. A key motivation for doing so has been that, in addition to the limited investment incentives conveyed by short-term rental contracts, share tenants will, in any given season, receive only part of their marginal product and thus have limited incentives to supply effort. Many theoretical and empirical studies have identified conditions, mainly in terms of other market imperfections, for sharecropping to be a rational strategy and quantified its productivity as compared to owner-cultivation.

While such analysis can provide useful insights and has led to a number of policy interventions, it takes the renting decision as given and makes few predictions about the extent to which rental markets’ response to exogenous changes is optimal in the sense of fully utilizing available opportunities. Exploring this issue is of policy relevance because with economic development in a modern economy, the incidence 2