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Abstract for:

Eviction Threats and Investment Incentives

Abhijit Banerjee,  Maitreesh Ghatak,  June 2003
Paper No' DEDPS 39: Full paper (pdf)
Tags: sharecropping tenancy; eviction threats; investment incentives.

Abstract:

We show that the effect of eviction threats on unobservable investment effort can be positive. We demonstrate this apparently counter-intuitive result in a model of tenancy where investment by a tenant in the current period raises the chances of doing well in the next period, and therefore retaining the job in the period after next period. If the tenant earns rents, the landlord can partly substitute eviction threats for the crop share as an incentive device. This makes it more attractive for him to elicit investment effort. However, there is a direct negative effect of eviction threats on the tenant's discount factor. We find conditions under which the former effect dominates and eviction threats can increase investment incentives.