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A theory of interlinked rural transactions (English)

This paper argues that the interlinking of labor, output, and credit contracts often observed in rural economies can be regarded as an attempt to improve allocative efficiency in the face of moral hazard. It advances an economic explanation of the phenomenon which is rooted in the view that prevalent modes of transaction, of which interlinked contracts are an example, are shaped by technological considerations. Interlinking is shown to be an efficient economic response to unequally distributed information arising from the uncertainty which characterizes subsistence agriculture. All Pareto-efficient allocations require a combination of wage-cum-output sharing with consumption credit contracts. The analytical framework set up to demonstrate the results is used to examine the response of the contractual parameters to changes in: (i) the returns to alternative occupations available to tenant/laborers; (ii) the cost of credit to the village economy; and (iii) the riskiness of cultivation. The analysis concludes that public policy to alleviate rural poverty must recognize the relationships between technological considerations and modes of transaction in the absence of a complete set of markets.

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Citation

Mitra, P. DRD

A theory of interlinked rural transactions (English). World Bank reprint series ; no. REP 260 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/694451467980451342/A-theory-of-interlinked-rural-transactions