Rural Property Rights, Returns to Scale and Contracts

Lead Research Organisation: University of Houston
Department Name: Department of Economics

Abstract

This proposal falls under the Agriculture theme.
Our research entails two projects that examine the impact of rural land rights on the decisions and outcomes of farmers in China. In the first project, we are interested in how giving farmers the legal right to lease their land may affect their ability to improve their outcomes. There are two particular ways through which we think that individuals' decisions may be changed by the introduction of leasing rights in a context where farmers previously only had use rights and could not legally engage in any market land transaction such as selling or renting. First, leasing rights may allow farmers to adjust and optimize the size of their land-holdings by renting in or renting out land. Second, the ability to lease out land may allow farmers to leverage the value of their property without working the land themselves. In this way, land leasing rights may alleviate constraints on labor mobility and allow some farmers to migrate to urban areas to pursue different labor market opportunities. We combine economic theory and detailed micro-level data to analyze this question. This research agenda can have potentially important implications for agricultural productivity and the flow of labor towards new economic opportunities both in China and in many other developing countries where institutions that enable private property rights are underdeveloped.
In the second project, we are interested in thinking about the determinants of the types and the terms of the contracts that farmers sign when allowing other farmers or agricultural firms to use their land. After understanding the choices made by farmers regarding land contracts, we will analyze the impact of these contract choices on agricultural investment and productivity. This research agenda builds on economic theories that suggest that some types of contracts may lead to lower investment and lower levels of productivity. For example, farmers may enter into contracts that reduce their incentives to make profitable investments in the land in order to obtain insurance against negative shocks. This analysis makes use of a land reform that occurred in some areas of rural China where farmers were allowed to use their land as capital investment to enter into profit-sharing contracts with large-scale agricultural firms. Because our research project has a novel focus on contracts with both agricultural firms and with other individuals, we will collect a new data set that includes detailed information from both farmers and agricultural firms on their agricultural investments and outputs as well as on the contracts between these parties. This research will provide valuable insight into how land market interactions among farmers and between farmers and agricultural firms affect rural economic growth. In addition, the results of this project can also provide policy-relevant implications for process of economic transition associated with the rise of large-scale agricultural farming.

Planned Impact

First, the immediate beneficiary is the policymakers in China, especially those at the Ministry of Agriculture in China. They can learn from our analysis about the successes and failures associated with these two recent rural reforms. Our research highlights the direct effects of these land reforms on investment in land and land productivity, but it also underscores potential indirect consequences of property rights reform, including the impact on rural-to-urban migration and how the combination of farmers' risk preferences and incomplete markets in insurance affects the development of agricultural firms. The second reform, which began to allow farmers expanded property rights to formally use their land as investment capital to form a joint-stock company with agricultural enterprise, is only at the experimental stage. It was only implemented in several provinces. Therefore, our findings can inform policymakers whether they should implement this particular policy at the national level. As the rural reforms in China progress into the next stage, policymakers want to know whether they should promote ownership contracts between farmers and agricultural firms to achieve agricultural industrialization; at the same time, they worry about socially unstable situations where farmers may lose s the land,which is their essential means of production, if the joint-ventures don't run well. Our second sub-project will evaluate these small-scale experiments by the means of modern economic analyses.
Another non-academic beneficiaries are policymakers in other developing countries where property rights over rural land continue to be ambiguous and land transactions are uncommon. They can learn from the Chinese experience and determine whether the similar land reform maybe practical in their countries.
Indirectly, farmers can also benefit from our research. In this study, we will be examining farmers' livelihood and their agricultural productivity. For example, if we find that the land property rights decrease productivity, it will bring more awareness to the policymakers as they may need to provide more assistance to farmers. Or if we find that the land property rights increase rural-to-urban migration, then policymakers may need to consider the welfare of those migrants as this phenomenon may become more widespread.
As for academic beneficiaries, this dataset will be useful for social science researchers who are interested in contract formation, agricultural productivity and property rights reforms. To our knowledge, this dataset would be the first large publicly available data set that matches tenants to landlords with detailed information on both parties as well as the contract itself. Moreover, the empirical results of our research will be beneficial for other social scientists to formalize models in decision making in agricultural settings. The theoretical model they generate can then be tested with the dataset we generate.

Publications

10 25 50
 
Description Significant new knowledge generated:

The security of land rights and the functioning of land markets can have important effects on the ability of farmers to maximize agricultural productivity. This project is one of the first to examine the impact of the 2003 Rural Land Reform in China, which gave farmers formal leasing land rights. We evaluate the impact of rural land reform on farmers' flexibility in response to cotton price changes. We find that more land leasing occurs in villages with positive cotton price shocks that have implemented the formal law to protect leasing rights. We also see a shift towards cotton production in terms of more land being allocated to cotton and more production in cotton. We also look at the intensity of the use of various agricultural inputs. We find that farmers use more chemical fertilizer as a result of the law.

The result suggests that the reform gives farmers more flexibility in adjusting the size of land in response to the crop price change. During the time when cotton prices spike, as a result of the reform, farmers have more flexibility in leasing more land and producing more cotton effectively. This reform should help improve farmers' livelihoods. This finding is important to policymakers in China as the process of strengthening property rights in rural areas is still ongoing. These research projects have important implications for policy in many other developing countries where property rights over rural land are ambiguous and land transactions are uncommon.

We also find that one drawback of the reform is that farmers use more chemical fertilizer after the reform. This is probably due to the fact that farmers are mostly leasing land for the short term, and chemical fertilizers are known to have short-term payoff in increasing yield but in the long run can erode soil quality. Acidification of soil in China has been a concern among agricultural economists and environmental scientists. A recent publication in Science has suggested that soil acidification in China is attributable to the overuse of chemical fertilizer. Thus, our finding is important for not only economists but also environmental scientists whose goals are to understand how to prevent farmers' overuse of chemical fertilizer. Our finding provides suggestive evidence that having a short-term lease might affect the use of the chemical fertilizer.

Important new research questions opened up:

Among the new research questions being opened up, the more directly related ones would be first to establish the causal evidence between the term of the lease contract and chemical fertilizer use. One can model farmers' decision to use chemical fertilizer based on the short-term versus long-term tradeoff. Next, one implication of our findings is that the soil quality could be worse in places with rural land reforms (since most agricultural land leasing in this context is only for the short term). One would need to collect soil and test its quality in the lab (similar to the publication in Science).

Significant negative results or research paths closed off:

During the roundtable discussion we hosted in July 2014, we learned that one cannot simply examine the effect of provincial-level land reform, since it could be endogenous. One example of endogeneity is that areas with more leasing activities are more likely to adopt provincial land-reform implementation early. This would lead to a biased estimate of the impact of provincial-level reform upward.

Particularly noteworthy new research networks, collaborations or partnerships, or combinations of these:

As a result of this project and the roundtable discussion, one of the co-Principal investigators, Dr. Yongxiang Wang, is now collaborating with one of the roundtable participants, Dr. Ou Wang (Deputy Manager, Rural Economy Research Center Survey Team, Ministry of Agriculture; Associate Research Fellow). They are working on a project related to the reform and China's real estate market. The Principal Investigator, Dr. Elaine Liu, is also collaborating with another participant in the roundtable, Dr. Jikun Huang, on the discount rates of rural households.
Exploitation Route Our findings can be taken forward by policymakers in China, especially those at the Ministry of Agriculture in China. These policymakers can learn from our investigations about the successes and failures associated with these two recent rural reforms. Other non-academic beneficiaries are policymakers in other developing countries where property rights over rural land continue to be ambiguous. This finding can help inform the future decisions of Chinese policymakers, as well as policymakers in other countries, at the local and central levels about how to structure future land reforms and leasing terms.

Academically, our findings can also be taken forward by economists. This project provides rigorous, quantitative evidence on the effects of land reform, which are of interest among economists who are concerned about the inefficiency associated with insecure land rights. Our findings on the increased use of chemical fertilizer should be of interest to environmental scientists. These findings open up important research questions about leasing terms, chemical fertilizer use, and soil quality. Our findings also provide a possible explanation for those who are concerned about soil acidification in China.
Sectors Agriculture, Food and Drink,Environment,Government, Democracy and Justice

URL http://www.class.uh.edu/Faculty/emliu/esrc/foresrc.pdf
 
Description Our research highlights the role of formal rural property rights in facilitating agricultural investment and in improving productivity and growth. Furthermore, these projects contribute to our knowledge about the processes of economic transition in rural areas, including the allocation of labor and the growth of large-scale agricultural businesses. The results of our research will provide rigorous, quantitative evidence on the positive and negative economic effects of reforms that provide legal protection to land leasing and that shape the contracting interactions between farmers and agricultural firms. There are two major non-academic beneficiaries of this research project. First, policymakers in China, especially those at the Ministry of Agriculture in China, can learn about the successes and failures associated with recent rural reforms. However, since our work has not yet gone through the peer review process, we will postpone making policy recommendation based on our preliminary results until after we complete the peer review process over our research findings. The second major non-academic beneficiary are NGOs or policymakers in other developing countries where property rights over rural land continue to be ambiguous and land transactions are uncommon. Most recently, a social venture capital firm H2Ovp (also awarded by DfiD) reached out to the Principal Investigator, Professor Elaine Liu, for suggestions and advice regarding their investment project on irrigation contracts in Rwanda. Our research and findings are informative for this organization since the irrigated land in Rwanda is owned by the state, not the farmers.
First Year Of Impact 2015
Sector Agriculture, Food and Drink
Impact Types Societal,Policy & public services

 
Description Consultancy to a social venture capital firm H2O
Geographic Reach Africa 
Policy Influence Type Influenced training of practitioners or researchers
 
Description Columbia Univeristy 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Professional Practitioners
Results and Impact Presented it at Columbia University development seminar.
Year(s) Of Engagement Activity 2017
URL http://cdep.sipa.columbia.edu/events-calendar/development-workshop-shing-yi-wang
 
Description Conference on Rural Issues and Development 
Form Of Engagement Activity A formal working group, expert panel or dialogue
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/parliamentarians
Results and Impact The conference sparked discussions and increase exchanges between academic researchers and policymakers.
It also stimulates more research related to rural land reform in China.

Based on Dr. Shouyin Liu and Dr. Jikun Huang's suggestions during the conference, co-PI and I are undertaking a couple new research projects exploring the relationship between rural land rental platform and land renting activities.
Year(s) Of Engagement Activity 2014
URL http://www.class.uh.edu/Faculty/emliu/conference_program.pdf
 
Description Seminar at World Bank 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact Presented the paper at the World Bank.
Year(s) Of Engagement Activity 2017
URL http://www.worldbank.org/en/research/brief/microseminar2017
 
Description Stanford 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Professional Practitioners
Results and Impact Giving a talk at Stanford University, and roughly 30 faculties and students attended.
Year(s) Of Engagement Activity 2017
 
Description Summary on VoxDev 
Form Of Engagement Activity Engagement focused website, blog or social media channel
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact It was published on voxdev.org
Year(s) Of Engagement Activity 2018
URL https://voxdev.org/topic/agriculture/land-rights-and-agricultural-efficiency
 
Description Yale Agriculture and Development Conference 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Other audiences
Results and Impact Presented the paper at the 2017 Agriculture and Development Conference at Yale University
Year(s) Of Engagement Activity 2017
URL https://egcenter.economics.yale.edu/2017-agriculture-and-development-conference
 
Description voxchina 
Form Of Engagement Activity Engagement focused website, blog or social media channel
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact published on voxchina.org
Year(s) Of Engagement Activity 2018
URL http://www.voxchina.org/show-3-62.html