An Institutional Economics Analysis of Land Use Contracting: The Case of the Netherlands

The area of leased land in The Netherlands has decreased from roughly50% of all agricultural land in 1966 to about 27% in 2005. In 1995, the Dutchgovernment introduced two new types of lease contracts in order to prevent the decline from continuing. The new types of lease contracts implied the possibility of transferring a smaller part of the bundle of property rights from landowner to tenant. However, the trend towards decreasing lease area did not stop. In 2007, a new reform was introduced implying, again, less restrictions on formal leasing (the so-called liberalised lease). According to contract theory, transferring fewer property rights from a landowner to a tenant-farmer will lead to an institutional change for land leasing. For policies regulating land leasing, it is therefore important to recognise the characteristics of contractual arrangements and the parties involved. In this paper we analyse contract choice using a Trivariate probit model and taking into account the type of landowner and farmer characteristics. Results show that an official contract is more likely to be chosen if public organisations are involved. In contrast, when farmers exchange land among themselves, they are more likely to use less explicit contracts in which trust and reputation play an important role for coordination.