Any contract combining resources from different owners for production involves,in addition to negotiation costs,the enforcement costs of controlling inputs and distributing output,according to the terms of the contract.Contracting on a share basis appears to involve higher transaction costs as a whole（the sum of negotiation and enforcement costs）than a fixed-rent or a wage contract.The terms in a share contract,among other things,include the rental percentage,the ratio of nonland input to land,and the types of crops to be grown.[11] These are mutually decided by the landowner and the tenant.For fixed-rent and wage contracts,however,given the market prices,one party alone can decide how much of the other party's resources he shall employ and what crops shall be grown.And since in a share contract the sharing of output is based on the actual yield,efforts must be made by the landowner to ascertain the harvest yield.Thus negotiation and enforcement are more complex for a share contract than for a fixed-rent or a wage contract.
The ranking of transaction costs of fixed-rent and wage contracts appears uncertain.The physical attributes of land are such that the cost of enforcing the contracted amount of input is lower than with labor.That is,the"shirking"of labor input,which may exist in a wage contract（also in a share contract）without either enforcing the input or checking the output,is costly to prevent.[12] But while this"shirking"problem does not appear significant for land input in a fixed-rent contract,policing（or enforcing）the maintenance of soil and other assets owned by the landlord is more costly for a fixed-rent or a share contract than for a wage contract.[13] If we accept the above reasoning,pending empirical confirmation,and if transaction cost is the only consideration,then the minimization of transaction cost implies that share contracts will never be chosen.Why,then,are share contracts chosen?
Suppose the transaction cost is zero or the same for all forms of contract.Let us employ a behavioral postulate of risk aversion,defined here to mean that an individual,given the same expected average income,prefers a lower to a higher variance.In agriculture,variables exogenous to the production function,such as weather conditions and pests,are risk factors which are difficult to forecast and which may significantly affect the variance of the value of output.Under a fixed-rent contract,the tenant bears most,if not all,of the risk;under a wage contract,the landowner bears most,if not all,of the risk.Share tenancy may then be regarded as a device for risk sharing（or risk dispersion）；that is,the variance of the output yield is distributed among the contracting parties.Given the postulate of risk aversion,a share contract will be mutually preferred by the landowner and the tenant.[14] Risk,however,exists in varying degrees in any tenancy.Why,then,are fixed-rent and wage contracts chosen at all?
I suggest that the choice of contract be analyzed by employing both the dilferences in transaction costs and the postulate of risk aversion.Given the state of risk associated with a particular output,a higher transaction cost will lead to lower returns to the productive assets.On the other hand,given the transaction cost,risk aversion implies that asset values and the variances of income are negatively related.[15] While in itself the dispersion of risk under a share contract will lead to higher values for the con-tracted resources,the higher associated transaction cost will lead to lower asset values.Wealth maximization（or utility maximization,depending on the relevant measurement problem）im-plies that the contractual arrangement chosen will be the one which yields the highest values for the contracted resources.
Given the variance of output value and the rental percentage,a share contract prescribes a specific distribution of income variances for the contracting parties.The associated state of risk dis-persion may not conform to the most preferable state according to the parties'preference functions.Since some dispersion of risk is preferred to no dispersion at all,however,a share contract will be chosen rather than a fixed rent or a wage contract if the higher transaction cost is at least compensated for by the gain from risk dispersion.There exist,of course,still other arrangements under which the dispersion of risk can be tailored to fit each case.But as I shall discuss in the next section,the transaction cost of an arrangement for risk dispersion more flexible than a share contract may be so high as to make it undesirable.
Evidence is available to support the applicability of this kind of analysis:
1.Since transaction cost is asserted to be higher for share than for fixed rents,there would be room for a third party to insure the amount of crop yield.That is,if a third party（an insurance company）were to insure the expected mean yield,the contracting parties would choose a fixed-rent contract and would be willing to pay the insuring party an amount no higher than the saving from a lower transaction cost plus a premium for the almost certain income now obtained as compared with the variable income in a share contract.Yet we seldom find such a crop insurance without government's taking an active role.The reason,perhaps,is that the cost of handling insurance transactions may be so high as to be prohibitive:the insuring agent would have to check not only the actual crop yields but also the amount of nonland inputs.For the French metayage（sharecropping）,however,Constantia Maxwell observed:
The usual procedure for French seigneurs was,while retaining the chateau and its immediate neighborhood for their own use,to let out their lands in gros to middlemen or fermiers（to be distinguished from fermiers exploitants）,who paid a fixed sum to the proprietor and gathered the rents from metayage or censitaires at their own risk for a personal profit.Some of these middlemen,like the landlords,were absentees and worked the estate through sub-agents.[16]