Essays on China's Rural Land Rental Market: Institutions and Contract Design

Abstract

China's rural land rental market, a gradually maturing market, is now revolutionizing agriculture in China by facilitating the upgrading of smallholder production to factory farming. I study a mature rural land rental market using survey data I collected in 2014, concentrating on institutions of the market and rental contract design.

Chapter 1 focuses on the relationship between the rural land rental market and China's institutions for rural land and agricultural production in the past 30 years. Chapter 2 is devoted to survey design and data collection, introducing a new survey method that remedies deficiency of existing data and important variables that capture recent developments of the market. Chapter 3 describes the survey data from three perspectives to emphasize recent developments of the market, which includes heterogeneity in transactions (large-scale vs. small-scale) and market structure (modern vs. traditional) and changes in the role the village administration played in the market.

Chapters 4 and 5, with different research focuses, analyze rental contracts as ex-ante responses to ex-post contract violation associated with the primary uncertainty in the market.

Chapter 4 focuses on a hold-up transaction cost associated with the bargaining over contractual formality, which is caused by rental partners’ asymmetric preferences over contractual formality. I find that traditional rental transactions that occur only because of social proximity and the involvement of village administration are gradually being eliminated due to high transaction cost. Instead, the renting-in entrepreneurs from outside of the village are encouraged. In addition, I find that the renting-in agents usually lead the bargaining.

Chapter 5 concentrates on the bargaining over two important contractual terms: contractual flexibility and rental payment. My theory shows which equations should be estimated in an empirical test of the bargaining process. I draw two empirical conclusions. First, local entrepreneurs, as the renting-in agents, decrease contractual flexibility and increase rental payment, which promotes agricultural and village development. Second, the rental payment offered to the renting-out agents with long-term non-agricultural employment is higher than that offered to the renting-out agents with short-term or temporary employment, suggesting a potential increase in income inequality within the village.