Inthisandthefollowingthreechapters,IwillturntothefirstphaseofTaiwanlandreform.BeginningApril1949,asetofregulationsonagriculturallandleasewaspromulgatedandenforcedbytheTaiwanNationalGovernment.Underthisphaseofthereform,therentalpercentagewasreducedfromanestimatedmeanof56.8percentoftheannualyieldto37.5percent.[1]Thiswasappliedtoallfarmrentals（fixedandsharerentsalike）excepthorticulture.Themagnitudeoffarmingresourcesaffectedbythisenactmentisshownintable4,chapter8.Therelevantlegalprovisionswillbediscussedinthepropercontextinthisandthenextchapter.
Thedifficultyofanalysisseemstostemfromtheproblemsof（1）identifyingvariouslegalconstraints,boththosethatarevaguelyimpliedandthoseexplicitlystatedinlaw;（2）specifyingtheoptionsofchoice;and（3）ascertainingtheeffectivenessofvariouslegalconstraints.Thesamecontroldeviceunderdifferentlegalauthorities,forexample,maygiverisetodifferentoutessimplybecausetheinterpretationsoflawdiffer,ortheeffortsofenforcementdiffer.Theaboveconditionsmustbespecifiedbeforeonecananalyzetheobservableconsequencestheoreticallyandempirically.ThisIshalltrytodo.
Ibegintheanalysisbypresumingthattherentalpercentagealoneislegallyandeffectivelyreduced.Otherrestrictionswillbeconsideredlater.Itisusefultoclassifythepredictableeventsasimpliedbyeconomictheoryintotwomaingroups.Thefirstgroupareoffsettingcontractualrearrangements,whichincludepensatingpaymentsandchangesintenurearrangementsthroughthetransferofrights.Thesecondaretheresourcereallocations.InthischapterIshallconcentrateonthefirst.
A.TheHypothesisofOffsettingContractualRearrangements
Anoffsettingcontractualrearrangementisdefinedasacontractualrevisionwhich,intheabsenceoftransactioncostsandrisks,producesnoeffectontheinitiallycontractedresourceallocationandinedistribution.Alegalrestrictionontherentalpercentagewillinduceavarietyofcontractualrearrangementsbetweenthecontractingpartiestorestoretheequilibriumthathadbeenarrivedatbythemarkettermsofcontract,unlesstheserearrangementsareprohibitedbylaw.Theserearrangementsmayberegardedastransfereffectsresultingfromtherentalsharerestriction.
Supposeanunrestrainedmarketrentalpercentageof70percentoftheannualyieldislegallyrestrictedto40percent.Ifnoadjustmentwhatsoeverismade,theresultofthispercentagereductionisaredistributionofinefromthelandownertothetenant,anoutewhichTaiwanreformershadintended.Withoutreallocatingresources,whatwillthecontractingpartiesdo?
CompensatingPayments
Asadevicetoattentuateprivatelandrights,therestrictiononrentalpercentagealoneaffectslittle,ifanythingatall.Withtheownershipoflandexclusivelydefined,thereareseveralrevisionsintheformofpaymentthatthelandownercouldusetoprotecthiswealthpositionwithoutviolatingtherestriction.(1)Thesimplestoftheseistochargelump-sumannualpaymentsoffsettingthereductioninrentalpercentage.Thiscanbedoneinavarietyofways.Onewayistochargeafulllump-sumintheformof"key"moneyorinthenameofasecuritydeposit.Ifthedurationofleaseiscontractedforseveralyears,thelandownermayrequirethetenanttopayapresentlump-sumequaltothediscountedvalueofthereducedannualrentalineforthecontractedyears.(2)If,beforetherentalsharerestriction,partofthenonlandfarmingcosthadbeenbornebythelandowner,hemaysimplyrequirethetenanttopaythefullcost.(3)Ithadbeenapracticeinsomesharecontractsthatalandownerallowedthetenanttousepartofthelandtogrowsome"cereals"forthetenant'spersonalconsumption,whichwerenotrequiredtobeshared;instead,theownerwouldchargeahigherrentalpercentageofthestipulatedcrops.Undertherentalsharerestriction,thelandownermayshareinallcropsalike.Dependingonthemagnitudeofthepercentagerestrictionandtheoriginaltermsofthecontract,itisclearthatthelasttwomethodsbinedmaynotbesufficienttorestoretheinitialsituation.
TenureRearrangements
Supposepensatingpaymentswerealsolegallyprohibited.Thelandownercouldprotecthiswealthpositionbychangingtenurearrangementsthroughatransferofpropertyrights.Thiscanalsobedoneinavarietyofways.(1)Hemaysimplyrepossessthetenant'sholdingandfarmthelandhimself,orhirelaborerstodothetilling.(2)Supposetheleasedurationcontractedissuchthatthelandownercannotcanceltheleaseforlandrepossession.Hewillbewillingtoofferafeetothetenanttobuybacktheleaseright.(3)Alternatively,thelandownermaysellhisholdingsoutrighttohistenants,atapriceperacreequaltothediscountedpresentvalueofrentperacrebeforethesharerestriction.(4)Ifatenantdoesnothavesufficientfundstopaythelandpriceimmediately,aninstallmentplanmaybemadewherebyhepaysthelandownernomorethantherentalannuity.Thetransferoftheownershipoflandtothetenant,however,isaclearrestorationoftheinitialwealthconditiononlyifthepriceoflanddoesnotfall,thatis,ifthereisnospecializationinriskbearingormanagement,orifthereisnodeclineinspeculativedemandtoholdlandasaresultofthelandreform.