Legal protection for agricultural land leasing contracts facilitates productivity-enhancing trades and increases agricultural efficiency
In many countries, especially developing countries, we often observe property rights institutions that fail to define clear and secure rights, or hinder the free exchange of property. Economists have long emphasised the importance of property rights institutions for markets to function well and for economic prosperity to be possible (North 1981, de Soto 2000). Theory suggests that allowing for free market transactions should move land resources towards productive uses. This can increase agricultural productivity and transform the rural economy, leading to aggregate economic growth.
In reality, however, the extent to which property rights in land markets matter is less clear. Some researchers have questioned the importance of formal rights, arguing that informal institutions may be adequate substitutes (Ostrom 1990, Brasselle et al. 2002). There may be other market failures or constraints in these environments such that improving property rights institutions and the functioning of land market will not, in isolation, improve outcomes (Carter et al. 1994, Singh et al. 1986). Therefore, the impact of formalising land exchange rights remains an open empirical question.
Our study: Exploring the effects of a property rights reform on Chinese agricultural productivity
In a recent working paper (Chari et al. 2017), my co-authors and I explore the idea that better property rights institutions facilitate market exchanges and increase agricultural productivity. We focus on one specific reform that was announced at the central level in China in 2003, namely, the Rural Land Contracting Law (RLCL). The RLCL increased legal protections for land contracts and specifically granted farmers legal protections for leasing contracts over agricultural land.
Studying the impacts of a specific reform is complicated because many changes have taken place throughout China over time. Comparing outcomes before and after 2003, for example, may simply capture other trends occurring in China during the same time period. In our analysis, we exploit the fact that different provinces implemented the RLCL in different years after 2003, and compare outcomes for the same agricultural households before and after the RLCL was implemented in their province. The timing of the implementation varies by province but seems unrelated to conditions in the rural economy, allowing us to separate out the effects of the reform from other aggregate changes taking place over time.
Our results: An increase in aggregate productivity driven by the reallocation of land and labour
We find evidence of a significant increase in land rental activity in rural households following the reform. Specifically, the probability of new renting transactions increased by about 10% and the area of land rented out increased by 7%. This indicates that the property rights reform allowed households to adjust their land holdings through renting. Next, we examine the effect of the property rights reform on aggregate agricultural productivity and output. The findings show that at the village level, the land reform has significantly increased overall output and aggregate productivity by approximately 7%.
While land renting transactions and agricultural productivity have increased, we are specifically interested in looking at the reallocation of land across farmers and in quantifying the extent to which market exchanges of land among farmers can account for the increase in output. We find evidence that the reform led to an increase in the amount of land cultivated by more productive farmers, while reducing the amount of land cultivated by relatively less productive farmers.
We also consider the effects of the property rights reform on labour market outcomes. We observe that the amount of hired labour increases on relatively more productive farms but declines on less productive farms, suggesting a within-village reallocation of labour. This isn’t surprising given that labour is a complementary input to land.
In sum, we find that nearly 85% of the observed increase in aggregate productivity can be attributed to the reallocation of land and other inputs associated with the reform. We also find that when land changes hands, the crop mix often changes as well.
Land reform may not only correct the allocation of land in a static sense, but may also increase the responsiveness of land allocation to agricultural shocks. One important source of risk in the agricultural sector is changes in agricultural prices. We analyse whether the reduction in land transaction costs due to the reform allowed farmers to respond better to changes in agricultural output prices. In particular, we document that an increase in the price of a crop induces greater reallocation of land towards that crop in the post-reform period (relative to the pre-reform period). This result provides some insight into one way in which the reform has reduced frictions in the efficient allocation of land resources.
In the context of agriculture in many countries beyond China, ownership and use rights over land are often poorly defined and this plausibly affects the ability and incentives of farmers to transact in land. Our research demonstrates that households cannot fully solve the contracting problem in informal ways and that legal protections for exchange rights are important for efficient allocation of land across farmers and of labour across sectors and space. Overall, our results establish both the importance of land misallocation as a source of productive inefficiency in the agricultural sector, as well as the positive role that well-defined property rights can have in ameliorating the problem.
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Chari, AV, E M Liu, S-Y Wang and Y Wang (2017), “Property rights, land misallocation and agricultural efficiency in China”, Working Paper.
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