Eviction Threats and Investment Incentives

26 Pages Posted: 30 Apr 2008

See all articles by Abhijit V. Banerjee

Abhijit V. Banerjee

Massachusetts Institute of Technology (MIT) - Department of Economics

Maitreesh Ghatak

London School of Economics (LSE) - Department of Economics

Date Written: June 2003

Abstract

We show that the effect of eviction threats on unobservable investment effort can be positive. We demonstrate this apparently counter-intuitive result in a model of tenancy where investment by a tenant in the current period raises the chances of doing well in the next period, and therefore retaining the job in the period after next period. If the tenant earns rents, the landlord can partly substitute eviction threats for the crop share as an incentive device. This makes it more attractive for him to elicit investment effort. However, there is a direct negative effect of eviction threats on the tenant's discount factor. We find conditions under which the former effect dominates and eviction threats can increase investment incentives.

Suggested Citation

Banerjee, Abhijit V. and Ghatak, Maitreesh, Eviction Threats and Investment Incentives (June 2003). LSE STICERD Research Paper No. DEDPS39, Available at SSRN: https://ssrn.com/abstract=1127008

Abhijit V. Banerjee (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Maitreesh Ghatak

London School of Economics (LSE) - Department of Economics ( email )

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United Kingdom
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HOME PAGE: http://sticerd.lse.ac.uk/dps/adds/ghatak/cv-lse-sept02.pdf

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