A theory of interlinked rural transactions

This paper argues that a landlord/owner-cultivator who is unable to monitor a tent/laborer's effort input will link a wage-cum-output sharing contract with the provision of consumption credit. The response of contractual parameters to (a) alternative opportunities available to tenant/laborers, (b) the cost of credit, and (c) the riskiness of cultivation is then examined. The analysis shows that public policy designed to alleviate rural poverty must recognize the delicate relationships between technological considerations (prohibitive monitoring costs) and modes of transaction (interlinked contracts) that arise in the absence of a complete set of markets.