Distress rentals and the land rental market as a safety net: contract choice evidence from Tigray, Ethiopia

Abstract

Rural households in the semiarid Northern Ethiopian highlands are net buyers of food. Crop failure due to erratic and unpredictable rainfall occurs frequently and leads to food shortages and income shocks. The renting out of land may be one of the coping responses of households exposed to shocks. We developed a theoretical household model for poor landlord households capturing their contract choice response to downside production shocks. We tested econometrically whether contract choice may depend on poverty, capital constraints, production risk and random shocks. The multinomial logit model estimates show that poor households experiencing random shocks are more likely to choose fixed-rent contracts as a distress response to shocks, suggesting that fixed-rent contracts may be used to meet immediate needs, but at the expense of future incomes. We also found that fixed-rent contracts are preferred when ex ante production risk is low, while sharecropping is more likely where production risk is high. Finally, we found an indication that the choice of a fixed-rent contract as a coping response to shocks comes as a last resort after all other means of coping are exhausted.