INTERLINKED CONTRACTS AND MORAL HAZARD IN INVESTMENT

In agricultural tenancy arrangements, the tenant is often required to undertake effort aimed at maintaining and improving the productive sto ck. This paper investigates the design of contracts which induce optim al investment of such effort. It is found that a long-term contract wh ich interlinks tenancy with a credit agreement is optimal. In equilibr ium the tenant obtains credit from the landlord at a rate of interest below the market, and is perpetually indebted to the landlord.