Contract Duration and Investment Incentives: Evidence from Land

This paper analyses the empirical determinants of contract length, a key and yet neglected dimension of contractual structure. I estimate contract length and contract type jointly using original data on tenancy agreements signed between 1870 and 1880 in the district of Siracusa, Italy. The results indicate that contracts are designed to provide incentives for both current production and investment, with an eye on transaction costs. There is also evidence that credit market imperfections make incentive provision costly and discourage the use of high powered incentives. Finally the analysis illustrates that joint estimation of contract length and type provides an accurate picture of the determinants of contract form. In contrast, focusing only on one dimension can mislead the interpretation of the evidence