Profitability, Productivity and Contractual Choice in Agriculture

Abstract

This paper examines cross-sectional trends in profitability, and explains them through contractual choice. Producers attempt to increase profits constrained by their production environments of imperfect markets and imperfect information. Contractual choice then offers an important variable which producers manipulate to increase profitability.-These two critical conditions are seen to determine the observed trends in the relationship between farm size and productivity. The study examines two contrasting production environments, two villages in the Punjab. The production enVironments of the canal colony village has two exogenously imposed constraints, eviction of sharecoppers through mechanisation, and a credit bias against small farms. This weakens the traditionally posited inverse relationship, and leads to profitability and productivity being positively related to farm size. The production environment of the Southern Punjab village has an additional endogenous constraint of an imperfect fixed rental market for land. The consequent reliance on sharecropping leads productivity to describe aU-shaped curve across farm size.