Contract Design in China's Rural Land Rental Market: Contractual Flexibility and Rental Payment

Ziyan Yang (University of Maryland, College Park)

Abstract: Established in the late 1990s, China's rural land rental market is now revolutionizing agriculture by upgrading smallholder production to factory farming. However, there is little empirical evidence on recent developments in this market, in particular on the design of rental contracts, which profoundly affects participants' welfare and agricultural production. I study rental contracts as outcomes of bargains over two contractual terms: contractual flexibility and rental payment. The theory I present shows which equations should be estimated in an empirical test of the bargaining process. The empirical structure indicated by my theory is markedly different from that in existing empirical contributions, which helps to explain why those contributions obtain seemingly inconsistent results. I conducted a survey in 2014 capturing current developments in the market. Applying the survey data to the theoretically justified empirical model, I draw two empirical conclusions in addition to providing support for my characterization of the bargaining mechanism. First, the renting-in agents' ownership of enterprises and their social proximity to the renting-out partners decrease contractual flexibility and increase rental payment, indicating that entrepreneurship within a village social network promotes agricultural development and village prosperity. 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.

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