Why Would Inefficient Contractual Arrangements Persist in Agrarian Society in Indonesia?

Abstract: As an attempt to contribute to the long-standing debate over sharecropping issue in land tenure, this paper focuses on explaining why would such inefficient contractual arrangement persist in agrarian society in Indonesia. The objective is to explore the determinants of contractual arrangements employed by farmers in rice production and their effect on economic efficiency, in order to understand the rational framework of the farmers in decision making. Two types of contractual arrangements have been examined in this paper. They are the sharecropping contract as compared to the fixed-rent one in the supply of land transaction, and the selling standing crops for cash as compared to the self-harvesting in the supply of harvesting transaction. The findings were drawn from a cross-sectional data, based on a survey to 203 paddy rice farmers in Cianjur District, West Java. A qualitative study in terms of in-depth interviews and focus-group discussion follows. This paper focuses on the role of the transaction costs and risk dispersion as the determinants of the contractual arrangements employed by the farmers. A situational analysis shows that those determinants were shaped by the situation of high environmental risk and uncertainty, accompanied by the weak access of the farmers to finance, insurance and product markets, and the labor shortage in the area. A two-stage estimator model for the selection bias correction was used to test the effect of the all the determinants to the productive efficiency of the farm, in which the selling-price of the output equals the cost per unit of output. This paper finds that while sharecropping was proven to minimize losses, it is not the case with selling standing crops arrangement. Therefore, sharecropping, was a rational choice of the farmers under the specific situation described above. This paper buys on Kahneman and Tversky's (1979) prospect theory in explaining the rationality of farmers in favor of sharecropping.