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12 J.L. & Econ. 23 (1969)
Transaction Costs, Risk Aversion, and the Choice of Contractual Arrangements; Cheung, Steven N. S.

handle is hein.journals/jlecono12 and id is 27 raw text is: TRANSACTION COSTS, RISK AVERSION, AND THE
University oj Chicago
Every transaction involves a contract. The transactions conducted in the
market place entail outright or partial transfers of property rights among
individual contracting parties. The contractual arrangements through which
these transfers are negotiated are several and varied.
It is common in land tenure literature to rank the relative efficiency of
various lease contracts. For example, share tenancy (or sharecropping) has
long been considered inefficient, as have leases with relatively short duration.
These views are based on an inquiry into the resource use implied by the
existing contractual arrangements. But the inquiry has been made without
explicit consideration of the pertinent property right constraint and cannot
account for the frequent choice of allegedly inefficient contracts. The wrong
question has been asked.
Elsewhere' I have derived the theory of share tenancy on the condition
that transaction costs, and in particular the costs of contractual negotiation
and enforcement, are zero. It shows that economic efficiency is the same
under various land tenure arrangements subject to the constraint of private
property rights. Although transaction costs exist in the real world, the theory
enables us to understand much of the farming behavior.2 However, the pres-
ence of a variety of contractual arrangements under the same constraint of
competition poses the question of the choice of these arrangements. In this
article, I set out an approach based on non-zero transaction costs and risk
* This article is an excerpt from my manuscript, The Theory of Share Tenancy-With
Special Application to Asian Agriculture and the First Phase of Taiwan Land Reform
(to be published by The University of Chicago Press). For their helpful comments I
am indebted to Armen A. Alchian, R. H. Coase, Harold Demsetz, Jack Hirshleifer, D.
Gale Johnson, Harry G. Johnson, John McManus, Theodore W. Schultz, and George
J. Stigler. Thanks for financial support are given to the Lilly Endowment grant sup-
porting the Study of Property Rights and Behavior at the University of California at
Los Angeles, and to the Ford Foundation grant for International Studies including
Agricultural Economics at the University of Chicago.
'Steven N. S. Cheung, Private Property Rights and Sharecropping, 76 J. Pol. Econ.
1107 (1968).
2See Steven N. S. Cheung, The Theory of Share Tenancy, chs. 3, 7 and 8.

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