Evidence on the incentive optimality of share contracts

Ever since Adam Smith, economists have argued that share contracts do not provide proper incentives. This paper uses tenancy data from India to assess the existence of missing incentives in this classical example of moral hazard. Sharecroppers are found to be less productive than owners, but as productive as fixed-rent tenants. Also, the productivity gap between owners and both types of tenants is driven by sample-selection issues. An endogenous selection rule matches tenancy contracts with less-skilled farmers and lower-quality lands. Due to complementarity, such a matching affects tenants’ input choices. Controlling for that, the contract form has no effect on the expected output. Next, I explicitly model farmer’s optimal decisions to test the existence of non-contractible inputs being misused. No evidence of missing incentives is found.

Consumption-Wealth Ratio and Expected Stock Returns: Evidence from Panel Data on G7 Countries

Using the theoretical framework of Lettau and Ludvigson (2001), we perform an empirical investigation on how widespread is the predictability of cay {a modi ed consumption-wealth ratio { once we consider a set of important countries from a global perspective. We chose to work with the set of G7 countries, which represent more than 64% of net global wealth and 46% of global GDP at market exchange rates. We evaluate the forecasting performance of cay using a panel-data approach, since applying cointegration and other time-series techniques is now standard practice in the panel-data literature. Hence, we generalize Lettau and Ludvigson's tests for a panel of important countries. We employ macroeconomic and nancial quarterly data for the group of G7 countries, forming an unbalanced panel. For most countries, data is available from the early 1990s until 2014Q1, but for the U.S. economy it is available from 1981Q1 through 2014Q1. Results of an exhaustive empirical investigation are overwhelmingly in favor of the predictive power of cay in forecasting future stock returns and excess returns.