Rationale for Paternalism: "Semifeudalistic'' Tenancy Contracts in Imperial Japan

Abstract

Risk sharing in the informal/traditional sector generally plays a critical role in the early development stages, but it destabilizes at some point. In Japan, the shogunate's scheme to bear owner-farmers' risk bearing through contingent land tax reductions when harvests were poor and in-kind land tax payments stabilized the owner--farmers' economy until the Meiji Restoration of 1868. When the Meiji government denied contingent land tax reductions and enforced monetary land tax payments, many owner farmers failed and became tenant farmers. Emerging landlordism adopted the risk-bearing role through contingent rent reductions and in-kind rent payments, which served as substitutes for the shogunate's risk-sharing measures from the 1880s, but landlordism destabilized in the 1930s. This paper investigates the reason for this sequence. First, we build a two-sector contract model to formalize the essence of tenancy contracts in modern Japan. Then, we show the quasiconcave structure of optimal contracts. Under a threshold, the landlord's surplus increases with risk, and the optimal risk-bearing degree increases with the tenant farmer's risk aversion; beyond the thresholds, these relationships reverse. Landlords were willingly paternalistic within the thresholds but not beyond them; at that point, a paternalistic welfare state had to step in, as in the 1930s.