Production Uncertainty and the Problem of Innovation in an Iinterlinked Credit-Sharecropping Contract : A Note

Abstract

This note introduces a crop-insurance scheme in a Gupta (1990) type of model of interlinked credit-sharecropping contract. Gupta's proposition that there exists a critical size of innovation for the landlord is shown to be valid even when the landlord does not face any risk of default of loan, if the insurance premium cost is fully borne by the landlord. But when this cost is shared by the tenant and the landlord, then this proposition may not be valid always. This note also shows that the tenant is more likely to resist innovation than the landlord when the output share of the tenant is not greater than his share of insurance premium cost.

Keywords: Crop-insurance scheme, production uncertainty, interlinked credit-sharecropping contract, innovation, tenant, landlord

JEL Classification: Q15, D89