tenancy may then be chosen as a second best option in specific environments (Basu 1992; Ghatak and Pandey 2000).<sup>3</sup> A large number of empirical studies aimed to quantify the ‘Marshallian’ inefficiency of sharecropping with variation in results that can be partly explained by differences in methodology (Otsuka and Hayami 1988). Even studies controlling for household fixed effects come to widely different conclusions, with estimates ranging from a productivity loss of 16% (Shaban 1987) to impacts that, while statistically significant, appear to be of limited economic relevance (Jacoby and Mansuri 2009).<sup>4</sup> Obtaining credible estimates requires that, in addition to controlling for unobserved household characteristics, two challenges be addressed. First, contractual arrangements vary with tenants’ capital endowments (Laffont and Matoussi 1995), ability (Lanjouw 1999), farming experience (Chaudhuri and Maitra 2001; DeSilva 2000), and the relevance of permanent structures or the need to preserve soil fertility (Dubois 2002; Ray 2005). Thus contract choice will be endogenous in many settings. Moreover, beyond its short-term impact, sharecropping may have longer term effects. Specifically, in a long-term relationship, the ability to develop reputation will, as in any repeated game, decrease the level of inefficiency observed in any given period. On the other hand, the fact that neither party can fully appropriate the surplus from long-term investment will reduce investment incentives by landlords and tenants compared to a situation where one party owns the land. Even if, in a given setting, it is a second best outcome, a reliable quantitative estimate of the productivity impact of sharecropping can provide an upper bound for the benefits from, say, eliminating the conditions (e.g. credit market imperfections) giving rise to such arrangements.

# **2.3 Analytical strategy and hypotheses**

The fact that, in West Bengal, restrictions on contract choice imposed in 1978 made it undesirable to enter into new lease contracts creates a situation where decisions about share tenancy arrangements and their modalities were made a long time ago and can thus plausibly be considered as exogenous. There are three reasons for this: First, landlords are unlikely to enter into new (formal) lease agreements as any new tenant would become eligible for registration and receive long-term tenancy rights, a notion supported by a precipitous decline in overall incidence of rentals. Second, short-term land transfers by (protected) tenants are precluded by prohibitions on sub-leasing that threaten those leasing out with loss of their use rights. Finally, a 25% or 50% sharing rule, depending on who provides inputs, is the only contractual option allowed by law.

> 3 In a labor surplus, subsistence economy, incentive-based informational rents and endogenous credit rationing which both arise from wealth constraints will imply that ownership affects efficiency and that productivity differences between tenants and family farms will be large with high levels of population pressure, few alternative employment opportunities, and intermediate levels of wealth (Mookherjee 1997).

> 4 Landlords ability to monitor is identified as a key reason for the small size of the inefficiency, similar to findings from earlier studies (Sadoulet, de Janvry, and Fukui 1997). As it is not costless, analysis of welfare effects would need to account for the opportunity cost of the time landlords spent on monitoring (Ai, Arcand, and Ethier 1997; Arcand and Rambonilaza 1999).

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