This paper develops and econometrically tests a model of labor contractual choice in developing countries, focusing on the choice between directly hiring labor on a spot market versus reliance on labor contractors. The theoretical model examines the role of market prices and factor endowments on contract choice and the role of labor contracting as an institutional innovation to reduce transactions costs associated with the use of hired labor. Econometric results confirm hypotheses that contracting becomes more profitable as farm size and collateral ownership increase, as family size decreases, and with tightening of the casual labor market.