Seminar 4

I. Is sharecropping inefficient?

1. Explain why share cropping is typically inefficient in a static framework.
2. Consider a case of repeated share cropping. The landlord observes the tenant's effort but they can't contract on effort. Explain how the landlord can use the threat of eviction to force the tenant to excert effort.
3. We want to study the (in)efficiency of sharecropping empirically. Explain why simply comparing sharecroppers to self owning farmers may be insufficient.
4. Explain the empirical approach followed by Shaban (1987). To what extent does this solve the problems raised above? Do you think his results are reliable?
5. According to Shaban (1987), what is the effect of sharecropping compared to self ownership?

II. Incomplete insurance

Consider the theoretical models of insurance discussed in class and in Ray ch. 15.

1. Consider first the model of moral hazard with two outcomes H and L, and where the probability of the good outcome is p. Each individual choses p, but incurs a cost c(p) with c'(p)>0, c''(p)>0.
   1. Explain first what happens when individuals are perfectly insured
   2. Consider next a case where each individual get Y_H when the outcome is H and Y_L when the outcome is L. Explain how such schemes can improve the individuals' welfare.
   3. Go as far as you can in designing the optimal Y_H and Y_L so they are both feasible and maximize welfare. You may assume that c(p)=cp².
2. Consider next the model of incomplete insurance where p is exogeneous, but where the farmer can leave the insurance scheme in the case of a good outcome, and hence keep the whole output H. The punishment for this is to be expelled from future insurance. The discount factor is ¦Â.
   1. Explain how and when the fear of expelling is sufficient to discipline insurance participants to participate.
   2. Show how an incomplete insurance contract as studied above can make some insurance possible even when the condition derived in a does not hold

III. Saving

1. Explain first why it may be reasonable that savings markets are less imperfect than credit markets. Next explain why we still may expect savings markets to be imperfect in poor countries (and countries in general).
2. Discuss to what extent ROSCAs can solve these problems