Efficiency of Land Allocation through Tenancy Markets: Evidence from China

Considering that neither farm labor nor land sales markets are expected to function effectively in China (as in many developing countries), the land rental market is likely to be the only practical means for achieving an efficient land allocation across households. When functioning, land rental markets provide benefits for both the farmers who want to dispose of their land to move to nonfarm sectors and those who wish to expand their farm size. Thus, thedevelopment of well-functioning land rental markets is critically important for facilitating the structural transformation of the economy from an agricultural-based economy to an industrialized one. In this article, we proposed a theoretical model of land rental transactions. Our basic hypothesis is that one of the major sources of land rental market failure in China is the risk of expropriation of land when land is rented out. Such risk not only impedes the household's farm size adjustment toward an optimal size in the absence of such risk but also discourages households from participating in land rental markets in the first place. The predictions of our model are empirically tested by using household survey data from China. Our estimated results suggest that the unclear land allocation policies of local governments increase the expected risk of land expropriation if land is rented out. In addition, higher off-farm wage rates are found to activate (or at least are correlated with) land rental markets; this is most likely because an increase in off-farm employment opportunities leads to enhanced gains from land rental transactions. In order to remove the impediments for tenure transactions in China, further strengthening of individual land rights (as well as their protection and enforcement) by local/regional governments is necessary. Under the current administrative land reallocation system, individual land use rights can be taken away, which appears to be thwarting incentives for farmers, including relatively unproductive part-time farmers who cultivate tiny plots of land, to rent out their land. Hence, according to our results, granting and protecting individual land rights on farmland is one of the major remaining institutional reforms that must be implemented in China in order to sustain China's rapid economic transformation. © 2011 by The University of Chicago.