WAGE LABOR, SHARECROPPING, AND CREDIT TRANSACTIONS

Linked sharecropping and credit contracts are common in less developed economies. In these the landlord provides consumption and/or producti on credit. This paper studies the rationale for interlinking under unc ertainty and endogenous effort and the terms of the optimal contract. Unlike previous studies, it assumes that tenants participate in the la bor market, which changes the mechanism by which interlinking works. I t is shown that typically the consumption loan interest rate is higher than the landlord's cost of capital while production credit is subsid ized. This provides a partial explanation for the wide range of intere st rates observed in these contracts.