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

Abstract: I study bargaining over contract arrangements---contractual flexibility and rental payments---that profoundly affects the ex-post surplus of China's rural land rentals in the context of urban--rural separation. My theory suggests which equations should be estimated to test bargaining over multiple contractual terms. My theoretically justified empirical structure differs from conventional models and helps to explain seemingly inconsistent empirical results reported in the literature. Using transactional data representing the full distribution of rental attributes, I draw two conclusions while also supporting my characterization of the bargaining mechanism. First, compared with renting-in partners, renting-out agents respond more strongly to non-agricultural employment uncertainty induced by urban--rural separation, which increases contractual flexibility. Second, social proximity helps non-stranger entrepreneurs obtain low-flexibility contracts without fully compensating renting-out agents, suggesting that urban--rural separation erects a social barrier to strangers that village trust lowers because social proximity and contractual flexibility are substitutes only in low-trusting environments.