14.74x Land Unit Homework Assignment 1 Sharecropping (Banerjee, Gertler, Ghatak) This problem will walk you through a principal agent contracting problem similar to that in the Banerjee, Gertler and Ghatak paper, "Empowerment and Efficiency: Tenancy Reform in West Bengal" (2002). You will not need the paper to do this problem, but you may find it useful. Download the paper on the course website. Consider the following setting: . Tenant farms the land and applies effort, e . Tenant's outside option is 0, and tenant has wealth w . The landlord cannot observe e . Both the tenant and the landlord are risk-neutral . Effort is costly. The cost of effort is }ce . Two things can happen: With probability e: Output is H - With probability 1 - e: Output is 0 (zero) . The tenant and the landlord write a contract which specifies a payment from the landlord to the tenant - Payment of h if output is H - Payment of I if output is 0 . Tenant and landlord maximize their expected utility, which is equal to expected income for the landlord, and expected income minus cost of effort for the tenant. Part A: Basic and First Best 1. What are the possible differences between a sharecropping and a fixed rent contract? (a) Landlord gets a fixed share of the output in sharecropping contract, but a fixed amount in fixed rent contract. (b) Landlord gets a fixed amount in the sharecropping contract, but a fixed share in a fixed rent contract. (c) Tenant gets a fixed share of the output in sharecropping contract, but a fixed amount in fixed rent contract