1. In the reallocation of resources, the changes in nonland input intensity responded in a variety of ways. More resources were directed to agriculture as a whole. While there was a small increase in owner-operated farms under the share restriction, we find nonland input intensity increasing in tenant farms and declining in owner farms. Specifically, we find (a) the land-farmer ratio declined for tenant farms and increased for owner farms, to the extent that the former was significantly lower than the latter; (b) tenants were reported to have worked longer hours and more days in a year, (c) fertilizers used were of higher quality; and (d) the increase in tenant income was reported to have been largely invested in land.
2. The implication that the marginal product of land in tenant farms was higher than elsewhere is confirmed by the following findings: (a) the reallocation of resources as described in paragraph 1 above; (b) the rise in crop area and crop hectare yield of intramarginal crops in tenant farms; (c) the significant rise in crop area for marginal crops added in tenant farms at a rate proportionately greater than the decrease in crop hectare yield, thus leading to a rise of total yield per acre of cultivated (physical) land in tenant farms; and (d) the production responses of horticulture.
3. The implication that the marginal products of resources other than land in tenant farms were lower than elsewhere is confirmed by the following findings: (a) the reallocation of resources as described in paragraph 1 above; (b) the general decrease in crop hectare yields for marginal crops added in tenant farms; and (c) the output responses of horticulture.
4. For paragraphs 2 and 3 above, the detected patterns of marginal crop choice also point to the same implications. The more frequent marginal crops chosen, as is demonstrated among vegetable crops, were those that require (a) a shorter growing time, or (b) a higher cost of planting. These patterns of choice are implied by the theory of share tenancy with rental share restriction.
9.Conclusions
This study has analyzed the interplay of property laws, economic theory, and observations of land use in Asian agriculture. This interplay, though complex, is perhaps the only approach through which the economics of land tenure can be properly understood.
Of the various aspects of the economics of property rights, I have concentrated on the theory and implications of leasing arrangements in agriculture. The share contract has been the main concern, for among tenure arrangements, sharecropping has been the main target of condemnation. Two sets of property right constraints were analyzed.
A preliminary investigation of property laws governing farm land ownership in China and Taiwan before 1949 concluded that a system of private property rights had existed in Chinese agriculture. The constraint of private property rights, therefore, was combined with standard economic analysis to derive a theory of resource allocation under share tenancy. Contrary to previous analyses of the subject, the theoretical results showed that different contractual arrangements do not imply different efficiencies of resource use. Implications of alternative theories were tested against observations chosen from periods and locations where the existing system of property rights agreed with the constraint of private property rights. Not only did the observations confirm my theory of share tenancy, but they refuted the tradi-
tional tax-equivalent approach. Indeed, the tax approach failed the trial of logic as well as the trial of fact.
The term "economic efficiency" used in this study has a simple meaning. It is a condition of market equilibrium logically deduced from the theory of choice, subject to the constraint of private property rights under a freely competitive market. It is a positive term, devoid of welfare implications. Viewing it as such, one wonders why the inefficiency argument of share contracts has prevailed for so long. Perhaps the illusion produced by the prima facie similarity between an excise tax and a share contract offers a marginal equality which appears attractive. Or perhaps the frequent condemnations of sharecropping in the land tenure literature provided a convincing impression of misallocation.
But the inefficiency argument against share leases is only one of several which have been used against the general system of tenant farming. For example, a high rent is taken as "exploitation" that dampens the tenant's incentive, and short-term leases are regarded as "insecure" tenure that inevitably reduces investment in land. Unfortunately, these assertions often have been taken as facts. And measures of agrarian reforms have been undertaken by governments to rule sharecropping illegal, to intervene in the terms of the contract, or to abolish farm tenancy altogether.
While I argued that the theoretical results of the tax-equivalent analysis are erroneous, I did not claim that unattenuated private property rights necessarily lead to efficient resource use in the real world. Certainly, decision errors alone may be wasteful. But under the specified constrained maximization, assuming zero transaction costs, the theory of share tenancy derived here shows that share tenancy satisfies the Pareto condition. Even though transaction costs in fact exist, the theory succeeds in explaining much of the observed farming behavior.
Since a variety of contractual arrangements exist under private ownerships of resources, I further questioned why different arrangements are chosen. By introducing transaction costs and risks, a choice-theoretic approach to this question was advanced. The general hypothesis —that contractual choices are made to attain the preferred distribution of risk subject to the constraint of transaction costs —was expounded against the factual background of the Chinese experience from 1925 to 1940. In the same way, it was argued that lease durations are chosen to minimize transaction costs.