Abstract:
The development of land rental markets in developing countries attracts much attention, but little is known about its impact on household income. This study empirically examines the effects of land rental decisions of farm households on their income and income components, i.e. farm, off-farm and transfer income, taking into account potential endogeneity of land rental decisions. Rural household survey data for 1080 households in 128 villages in Jiangsu Province, China are used to estimate these effects. Quantile regressions are used to examine to what extent effects differ between income groups. Results indicate that lessor households surprisingly obtain lower total income as compared to autarkic households. Among the lessee households, who gain on average from land rentals, the lower income groups obtain the largest total income gains. As to the sources of income, no significant differences in off-farm income between transacting households (i.e. lessee or lessor households) and autarkic households are found while differences in farm income between transacting households are as expected. Transfer income of lessor households is significantly lower than that of autarkic households. We explain these findings from some typical features of the rural land rental market in China and discuss the policy implications.
Introduction:
Theoretically, well-functioning land rental markets can increase rural household income and reduce inequality of rural incomes by providing a sorting mechanism, through which households with higher agricultural abilities and less off-farm job opportunities can rent in additional land and expand farm operation, thus increasing farm income. Less efficient farm households that are more successful in off-farm employment can gradually opt out of agriculture by renting out their land, thus increasing off-farm income (Deininger and Jin, 2005, Zhang, 2008, Jin and Jayne, 2013).
In reality, in developing countries where labor, credit and other factor markets function imperfectly or may even be missing, land-poor but more efficient households cannot always enlarge their farm size and increase farm income, while labor-abundant but less efficient households cannot always access off-farm jobs and increase non-agricultural income. The effect of land rental markets on household income and equity is therefore context dependent and hence an empirical matter (Otsuka, 2007).
Available studies on the income and equity effects of rural land rental markets in South Asia, Latin America and Africa find that renting-in land has a significant positive effect on crop income and household total income, while the impact of renting-out land on crop and total income is mixed. Land rentals (i.e., land renting-in or renting-out) appear to have little effect on off-farm income (Sarap, 1998, Carter and Salgado, 2001, Jin and Jayne, 2013, Chamberlin and Ricker-Gilbert, 2016).
Understanding the income and equity effects of rural land rental markets is highly relevant for current policy-making in China. How to consolidate small plots into sufficiently large ones and how to increase rural household income, given the fragmented and small-scale landholdings that resulted from the egalitarian allocation of farmland since the late 1970s, are major problems in rural development policy in China. China has a special two-tier rural land system: ownership of most rural land rests with rural collectives, while land use rights are devolved from rural collectives to individual households (Zhang, 2008, Jin and Deininger, 2009). In this context, rural land rental markets are viewed by both researchers and policy-makers as an instrument to solve these problems, and have actively been promoted by the Chinese government in recent years. As a result, farmland transfers have increased at an accelerated speed. The share of transferred farmland in the total area of household-contracted farmland in rural China rose from 4.8% to 30.4% over the 2007–2014 period (MOA, 2015). Does this rapid development of land rental markets contribute to income growth and more equity of household incomes in rural China?
Several studies have examined the effect of land rentals on rural household income and its distribution in China and provide mixed evidence (Benjamin and Brandt, 1997, Kung and Lee, 2001, Zhang, 2008, Xing et al., 2009, Yang, 2015). This is mainly because these studies focused on different regions of China, particularly in the middle-south or southeast of China, and different (mainly early) land rental market development stages in rural China. In addition, these studies did not take into account the endogeneity of land rental decisions, nor did they examine the possible differentiated income effects of land rental decisions.
This paper therefore aims to examine whether and to what extent the Chinese government’s promotion of the development of rural land rental markets reaches its goal of increasing rural household income and reducing inequality of rural incomes. Specifically, using data collected in rural Jiangsu (one of the most developed regions in China), we firstly use an OLS regression to estimate the average impact of land rentals on rural household income for the entire sample, and then use a quantile regression (QR) approach to estimate income effects for households in different brackets within the income distribution. To deal with potential endogeneity of land rental variables in the income equation, predicted probabilities of land rental decisions are estimated from a bivariate probit model, and are used as instruments for land rental decisions in the income equation. The insights obtained from these results are used to discuss potential implications for policy making.
The remainder of this paper is organized as follows. In Section 2 we outline a conceptual framework. In Section 3 we introduce the research site and the dataset used. In Section 4 we present the model specification, descriptive statistics and estimation strategy. Empirical results are presented in Section 5, whereas Section 6 concludes with a summary of our main findings and a discussion of policy implications.
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