Limited Liability and Contractual Structure in Agriculture *

Abstract: This paper explores the role of a limited liability clause – which allows a tenant to forego paying rent in the event of a crop failure – with regard to contractual structure in agrarian economies. If a tenant’s wealth is sufficient to cover fixed-rent commitments, even if output is low, he will receive a fixed-rent contract. For the landlord, this is preferable to other types of contract because when effort is non-contractible only a fixed-rent contract provides efficient incentives for labor input. If the tenant has little wealth, inefficient share-rent contracts emerge, with the resulting inefficiency varying inversely with the wealth of the tenant. As a result, landlords tend to prefer wealthier tenants