Landlords and farmers: implications of disparities in bargaining power for tenancy in agriculture
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The equilibrium allocation of owner operated and rental land in the agricultural sector is examined given risk
averse agents, risky returns and asset price risk. The model is extended to account for disparities in bargaining power
among landlords and farmers. In the absence of disparities, the competitive equilibrium allocation satisfies the
general conditions for optimal risk sharing with an adjustment factor similar to the optimal hedge ratio.
Differences in bargaining power result in deviations from the optimal risk sharing conditions. Numerical
simulations of tenancy structure are conducted for a developed agricultural economy exposed to various forms of
risk. Estimates of parameter values representing the riskiness of returns and asset prices in this study are based on
vector auto regressive techniques. The simulations show that a substantial reduction of the rental ratio is obtained in
a situation where farmers are equally or more risk averse than landlords. Consequently, the results indicate that the
importance of the tenancy institution as a risk sharing mechanism is severely mitigated in the presence of asset price
risk, risky returns, relatively risk averse farmers and disparities in bargaining power.