front (or -equivalently- independent of the output of production) may not be feasible or optimal from the perspective of all parties to the transaction.

In such a situation, two main reasons, risk sharing and limited tenant wealth, could mitigate against adoption of the fixed rent contract and in favor of a sharecropping contract. 36 Although it would reduce the incentive to exert effort, a share contract provides the possibility of partly insuring a risk-averse tenant against fluctuations in output. Where, in risky environments, a risk-averse tenant faces significant uninsured risk, a share contract may well provide the tenant with higher expected utility and thus be adopted despite the lower aggregate productivity involved. In fact, it can be shown that in this case, the Pareto optimal outcome will always require a trade-off between the risk-reducing properties of the fixed-wage contract, under which the tenant's residual risk is zero, and the incentive effects of the fixed-rent contract, which would result in optimal effort supply but no insurance (Otsuka et al.). Given risk aversion and incomplete intertemporal markets, a one-period contract is a second-best solution. Part of this shortcoming can be eliminated by statecontingent side payments in the context of a repeated game3<sup>7</sup> Limited tenant wealth increases the landlord's risk when a fixed-rent contract does not involve a front-end payment. In case of a disaster (such as a bad climatic shock) tenants with insufficient wealth are likely to default on the rent payment, implying that landlords will tend to enter into fixed rent contracts only with tenants who are wealthy enough to pay the rent under all possible output realizations. If tenants are poor, it will be optimal for the landlord to chose a share rather than a fixed rent contract (Shetty 1988). In a one period game this would imply that landlords would rank tenants by wealth, choosing to enter into contract only with the wealthiest tenants. Empirical evidence reported by Quibria and Rashid (1986) confirms such behavior. By implication, the efficiency of any particular tenancy contract is increasing in tenant wealth and the overall efficiency of the tenancy market would depend on the initial wealth distribution of potential tenants, generating a direct mapping between the distribution of wealth and economic efficiency (Bardhan et al. 1997). In a repeated game, landlords would allow all but the least wealthy tenants to earn positive profits in equilibrium, thus using the threat of contract termination (or eviction) as a device to elicit effort supply.

An extension of this argument is provided by Mookherjee (1997), who shows that in the context of bargaining on the terms of an interlinked tenancy contract between landlord and tenant the efficiency of

> still reported to be common in Bangladesh (Cain 1981), Java (Morooka and Hayami 1986), and Thailand (Fujimoto 1988). In the Philippines, tenancy transactions emerged as a credit substitute in response to limitations on the transferability of land (Nagarajan and associates, 1991). 1 A third rationale for adoption of the share contract, namely that imperfect information on tenants' unobservable characteristics such as ability, causes landlords to use sharecropping contracts as a screening device where the tenants' acceptance of certain types of contracts provides a signal for their productive ability (Newbery and Stiglitz 1979) does, at least for Indian data, not conform well with the data (Olson-Lanjouw 1995).

23