9. Economic Classes and Incomplete Contracts

This chapter uses principal-agent models to study how differences in institutions, specifically the incomplete nature of contracts and the exercise of coercion by some actors, result in differing levels of economic inequality. It revives the classical economists’ concept of class, observing that discrete class categories convey information not captured by wealth or other continuous measures due to the fact that members of a class engage in similar contracts with members of other classes.

The chapter explores sharecropping as a prime example of an incomplete labor contract, demonstrating how it leads to the sharecroppers’ effort below the Pareto-efficient levels and illustrating that the amount of time worked by the farmer under sharecropping is less than with contractible labor. It also examines the implications of verifiable information on labor time and the choice between different contract types. The chapter also models class conflict and collective action, analyzing how changes in contractual terms can alter the distribution of utility among landlords, workers, and sharecroppers.