Moral Hazard, Adverse Selection and Sharecropping in Ethiopia
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Sharecropping is commonly practised in developing countries but the debate over the existence and magnitude of its disincentive effects on productivity remains controversial under competing contracting models. We address the two issues by analysing the effects of sharecropping contracts on tenant's performance in two environments: selection bias into share tenancy due to cultivator heterogeneity and adverse selection from landowner side on land characteristics. Using longitudinal data collected for owner-cum-sharecroppers in Amhara, Ethiopia, controlling for the selection biases, we found significantly negative effects of sharecropping contracts on production outcomes and input provision. However, sharecropping inefficiency can be mitigated by cultivator-specific characteristics as household size, gender and productive assets, making policy suggestions on reducing market imperfections more relevant.