Land-related investment (e.g. soil dressing, deep plowing) is necessary for efficient agricultural production. This is particularly true for upland farming in which land improvement is essential. If farmers are freely able to invest in leased land, they will invest in order to obtain efficient production levels. However, if influential factors prevent farmers from investing, the underinvestment problem in leased land becomes apparent. Such circumstances appear in oral contracts, which are a type of ‘incomplete contract' in the sense that the contract length is not predetermined. Because of incomplete contracts, farmers are unwilling to invest since they cannot predict if they will recoup their investment value while being open to eviction threats (i.e. holdup problem).
The purpose of this paper is to discuss the empirical determinants on contract type (i.e. oral versus written) and the farmers' investment choice in land improvement, using original data from Atsumi-cho, Aichi Prefecture. Atsumi-cho was chosen as a suitable representative of upland farming in Japan.
The main findings are as follows. First, written contracts encourage farmers to invest in leased land. It was proven that the type of contract influences the incentive for land investment. Second, it was also found that the degree of trust (e.g. kinship and proximity) between the landowner and the farmer positively influences land investment. The third finding was that the degree of opportunity cost regarding the landowner's flexibility to engage in farming also influences contract choice. Landowners not likely to engage in farming were highly inclined to opt for written contracts.
These findings call for encouragement of written contracts by local governments, and a compensation scheme for investment value in order to provide farmers with incentives for land improvement.
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