Rural Property Rights, Returns to Scale and Contracts

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.

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.