The right to each privately owned resource is,by definition,transferable and exclusively delineated.Rights to resources invested in land and other assets are no exception.In the forma-tion of a lease contract,the participating resource owners are free to accept or reject the contractual terms being negotiated.Again,the choice of the duration of the contract is no exception.Thus the relevant question here is not whether a"short-term"lease is inefficient;the relevant question is why different lease durations are chosen.
In a world uncomplicated by transaction costs and risks,in which the right to the income generated by private investment could be costlessly secured and transferred,and in which changes in contractual stipulations could be costlessly negotiated at any time,the duration of the lease becomes irrelevant and its ex-plicit stipulation superfluous.With transaction costs included,I argue that the lease duration will be chosen to minimize these costs.To do so,it is convenient to separate the cost advantages of"long"and"short"lease durations.
The Choice of Relatively Long Lease Duration
A relatively long lease duration is chosen to reduce the cost of transferring（transacting）tenant assets attached to land.There exist differences in physical attributes of capital assets which involve different moving costs at lease dismissal.For example,a water buffalo owned by a tenant for grain grinding is easier to move at lease dismissal than an improvement in water irrigation made by him.Of course,the landowner could have invested in the water irrigation himself,or he could purchase the tenant's committed improvement outright.[5] But when assets attached to land are owned by the tenant,disputes may arise in the event of tenancy dismissal.A lease with a sufficiently long duration may become the preferred option.
However,the cost of moving the physical asset is not necessarily the relevant cost to consider.The tenant's property right to his committed investment may be transferred,either to a third party or to the landowner,at a market price.The problem is that such a price may not exist,or cannot be obtained in a short period of time,due to transaction costs.One need only point out that the depreciated value of a used asset is costly to evaluate;the landowner may choose to select his new tenant instead of allowing any party who purchases the asset to take over the lease.Also,other information problems exist in the marketplace.An appropriately long lease duration will thus reduce disputes and the anticipated cost of transferring the tenant's property right.This choice,however,can be made only at the expense of some cost advantage which a shorter lease duration provides.
The foregoing discussion can be supported by observations on the perpetual lease in China:
Under perpetual leases the landowner holds ownership right to the[bottom of]land,and the tenant owns the right to the soil……These two rights are separate.The occurrences of perpetual leases are confined to the following:（1）the tenant exploited[privately owned]wasteland and developed it into farm land,thus gaining a perpetual[ownership]right to the soil from the landowner.（2）Permanent improvements in land made by the tenant……such as building up water-conserving devices in otherwise sandy fields……（3）……where labor is scarce and land plentiful,the landowners attracted tenants from afar by offering the perpetual right to till[the soil]……（4）The tenant had paid a lump-sum payment to obtain the perpetual right to till……And（5）the peasant,when in need of money,sold the ownership right to the land bottom but retained the right to till the soil.Since ownership rights to the bottom and surface of land are separate,both the landowner and the tenant can sell their rights freely,without the consent from each other.[6]
In every instance,the tenant's asset attached to land（for example,the right to the soil）is physically"permanent."With the perpetual lease and the contracted terms in effect,the landowner may not arbitrarily raise the"bottom"rent（or use other devices）to drive the tenant away.Yet such a lease duration would not be necessary if transaction costs were zero:If the"bottom"and"surface"rights were clearly delineated and costlessly enforced as private,and if these rights could be costlessly transferred,there would exist market prices for these rights at which transfers could be executed at any time.[7] Thus there would be no need for long lease durations to protect the"immobile"investments of the tenant.The same can be said for other assets attached to land.
The Choice of Relatively Short Lease Duration
The adoption of a relatively long lease duration involves forgoing some cost advantage which a shorter duration provides.When assets attached to land owned by the tenant are to be exhausted in a short period of time,or when the landowner provides all the"permanent"assets,a relatively short lease duration reduces the costs of enforcing the contracted terms and of renegotiating these terms.
When a contract is formed,the contracting parties may lack sufficient information on each other's reliability.Within a specified lease duration,the violation of the contracted terms by either party may call for increasing enforcement efforts,or for revoking the contract before its termination date through court action or other means-all to be done at some cost.The choice of a shorter lease duration,which facilitates tenancy dismissal,will reduce these costs.As was noted at the beginning of this section,however,the frequency of tenancy dismissals was far less than that of short-term leases,suggesting that most terminated leases were renewed.Available data show that the frequency of lease dismissals caused by rental disputes was low.[8] I conjecture,therefore,that short-term leases are chosen more as a device to facilitate contractual renegotiation than as a device to reduce the costs of enforcing the contracted terms.