Pakistan Institute of Development Economics



Profitability, Productivity and Contractual Choice inAgriculture

This paper examines cross-sectional trends in profitability,and explains them through contractual choice. Producers attempt toincrease profits constrained by their production environments ofimperfect markets and imperfect information. Contractual choice thenoffers an important variable which producers manipulate to increaseprofitability.-These two critical conditions are seen to determine theobserved trends in the relationship between farm size and productivity.The study examines two contrasting production environments, two villagesin the Punjab. The production enVironments of the canal colony villagehas two exogenously imposed constraints, eviction of sharecoppersthrough mechanisation, and a credit bias against small farms. Thisweakens the traditionally posited inverse relationship, and leads toprofitability and productivity being positively related to farm size.The production environment of the Southern Punjab village has anadditional endogenous constraint of an imperfect fixed rental market forland. The consequent reliance on sharecropping leads productivity todescribe aU-shaped curve across farm size.

Moazam Mahmood

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