Capital requirements, screening and interlinked sharecropping and credit contracts

This paper provides one more rationale for interlinking credit and tenancy contracts in the context of production loans. In an environment characterized by a heterogeneous labor pool and imperfect information, landlords will have an incentive to avail themselves of screening devices. By linking tenancy and credit contracts a screening device can be implemented. The equilibrium set of contracts is characterized by a variety of interest rates, some of which might be below the market interest rate; the interest rate-principal schedule is downward sloping, with higher ability tenants choosing larger principals at lower interest rates.