As discussed earlier, early development economics tended to ascribe irrational and inefficient behaviors to the traditional agrarian economy as a reason for its underdevelopment. But analysis by economicsts such as Ted Schultz and Steve Chung began a quest for elaborating the hidden rationality underlying traditional agrarian structures and behavior. For example, the new theory of share tenancy notes that when insurance markets are imperfect or missing altogether, the tenancy contract acts as a partial insurance device. Under sharecropping, any loss is shared by both owner and tenant.
In general, according to Otsuka and associates, there is no evidence that share tenancy keeps employment of labor or other resources less productive than warranted. Agrarian contracts are found to adapt to real world enforcement problems; hence, share tenancy is more frequently observed in cases where monitoring is less costly, i.e. in closely-knit communities and families.
The need to provide work incentives and closely monitor labor to prevent shirking reveals an important advantage of the family farm as a production unit. Because of this, it is now commonly argued that economies of scale in agriculture are largely non-existent. However we do observe considerable land consolidation; such patterns may be due to market failure. Under imperfect credit markets, tenants face constraints in raising working capital from commercial sources. Banks may be more willing to lend to affluent landowners – who have collateral and a credit history – rather than to cultivators with no assets and no credit history in the formal sector. From a dynamic viewpoint, land serves as a store of wealth to smooth expenditures during income or consumption shocks. Because of these failures, the price of land remains artificially high . Furthermore land transfers are frequently motivated by “distress sales” rather than reallocation of land to more productive uses, leading to cumulative asset inequality.
To some extent, land rental markets offer an important means for improving asset inequality, as landless workers are able to climb the “agricultural ladder” of share tenancy, leasehold, and ultimately ownership.
From this perspective, land reform may have both positive and negative impacts. Conferment of ownership to cultivators may accelerate capital accumulation among the poor towards a more egalitarian and efficient distribution of assets. However redistributive land reform may incur high administrative cost; moreover, incentives to invest may be crippled during the interim period during ownership rights is yet to be transferred. Finally, controls on the rental market, including proscription of share tenancy, may deprive cultivators an important means to for sharing risk as well as foreclosing opportunities to the landless to climb the “agricultural ladder”.