LIMITED-LIABILITY AND THE EXISTENCE OF SHARE TENANCY

The paper considers the problem confronting an absentee landlord who can lease out his land on a fixed-rent contract, share-rent contract or a mixture of the two. It is argued that in poor areas it is natural to have each contract underwritten by an implicit, limited-liability clause, which allows a person to forego paying rent under extreme crop failures. In the presence of such an implicit clause, a certain tension appears between a tenant and a landlord with the former preferring risky projects and the latter preferring safe ones. It is shown that in such a case share tenancy turns out to be the dominant system, from among the class mentioned above, because it minimises the tension between the landlord and the tenant. The result is then used to discuss conditions under which share tenancy will tend to wither away.