Does Land Rent between Acquaintances Deviate from the Reference Point? Evidence from Rural China

• Date: 01 May 2020
• DOI: http://doi.org/10.1111/cwe.12331
• Author: Tongwei Qiu,Biliang Luo,Qinying He
• Published date: 01 May 2020

©2020 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 29–50, Vol. 28, No. 3, 2020

29

*Tongwei Qiu, Associate Professor, College of Economics and Management, South China Agricultural

University, China. Email: 15150561782@163.com; Biliang Luo (corresponding author), Professor,

National School of Agricultural Institution and Development, South China Agricultural University, and

School of Urban and Regional Science, Shanghai University of Finance and Economics, China. Email:

luobl@scau.edu.cn; Qinying He, Professor, College of Economics and Management, South China Agricultural

University, China. Email: heqy83@scau.edu.cn. The authors are grateful for support from the Keystone

Project of the National Natural Science Fund of China (No. 7133004) and the Keystone Policy Research

Project of the National Natural Science Fund of China (No. 71742003).

Does Land Rent between Acquaintances Deviate from

the Reference Point? Evidence from Rural China

Tongwei Qiu, Biliang Luo, Qinying He*

Abstract

This paper theoretically and empirically investigates whether acquaintance networks

influence the deviation of land rent from the reference point advanced by Hart and

Moore. The coeffi cient of variance and the range of land rent are used to represent the

degree of deviation from the reference point. Based on village-level data from the 2015

China Household Finance Survey, the estimated results indicate that land rent between

acquaintances is more likely to signifi cantly deviate from the reference point. Although

rental transactions are conducted between acquaintances, larger deviations from the

reference are also associated with a longer time to close deals. Our analysis using

household-level data further supports our fi ndings, indicating that land rental markets

embedded in the acquaintance networks of rural China are in a transition period and

have characteristics of both relational and market orientation. The policy makers

should introduce more outer village lessees or other market ingredients to increase the

voluntary marketization of land rentals inside acquaintance networks.

Key words: acquaintance networks, land rent, marketization, reference point

JEL codes: O13, P25, Q13

I. Introduction

The development of land rental markets is regarded as an effi cient approach to stimulate

labor migration and improve farm productivity (Feng et al., 2010; Gao et al., 2012;

Ma et a l., 201 5). Previous studies have claimed a positive relationship between land size

and farm productivity (Hornbeck and Naidu, 2014). The Chinese government has enacted

Correction added on 26 June 2020, after initial online publication. A duplicate of this article was published under the

DOI 10.1111/cwe.12294. This duplicate has now been deleted and its DOI redirected to this version of the article.

Tongwei Qiu et al. / 29–50, Vol. 28, No. 3, 2020

©2020 Institute of World Economics and Politics, Chinese Academy of Social Sciences

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several regulations to encourage cultivated land transfers from farmers with low productivity

to those with high agriculture capacities (Xia et al., 2017). However, land rental transactions

between partners with close social relationships are common in China (Deininger and Jin,

2005) and are associated with low productivity (Holden and Ghebru, 2005).

The existing literature regards land rental between acquaintances as informal

and focuses on its negative effects (Holden and Ghebru, 2005; Rozelle et al., 2008).

However, few studies have explored why land transactions are less likely to be formal

in rural acquaintance networks (Ma et al., 2015; Gao et al., 2019).1 For example, oral

contracts are seen as features of informal transactions and are widely used in land rental

markets (Ma et al., 2018). According to Hart and Moore (2008), a contract provides

a reference point for a trading relationship. Low land rent is more likely to trigger

perfunctory performance and result in default and other negative infl uences. In addition,

high land rent obtained outside acquaintance networks serves as an external reference

point that inevitably triggers perfunctory performance of lessors who obtain low land

rent. Deviating from the reference point should be avoided to ensure self-enforcing

agreement of land rental transactions, but is inconsistent with the common usage of oral

contracts and low land rent in rural China.

Naturally, reference points are rooted in competitive markets. When competition

is lacking, a legal price is unlikely to be achieved. Oral contracts cannot ensure that

contracts are self-enforcing. However, Cheung (1983) argued that unstable contracts

could be governed by other contracts to strengthen self-enforcement. Ostrom (1990) also

proposed that common norms and reciprocity could effectively eliminate contradictions

occurring between strangers. In other words, the reference point applies to competitive

transactions rather than those inside acquaintance networks. How can we ensure that

there is no competition between acquaintances? According to Qiu et al. (2018), more

than 50 percent of rental transactions between acquaintances are conducted for the

purpose of profi t and involve high land rent.2

1It should be noted that land rental transactions between acquaintances in this paper refer to transactions

conducted by farm households within the same village. This is because informal features are more visible

when transactions are conducted by members of the same village (Deininger and Jin, 2005; Wang et al., 2015).

Additionally, villages in rural China are tight-knit communities, and villagers share similar cultural traits,

social norms and self-governance rules, all of which indicate that land rental conducted by households within

the same village can fully represent the features and impacts of rural acquaintance networks.

2Transactions for the sake of obtaining high land rent or enlarging land size are defi ned as those undertaken for

the sake of profi t. Additionally, transactions with no charge (e.g. villagers may transfer land to their kin or parents

without any charge to ensure that the land is not abandoned) are defi ned as those not undertaken for the sake of

profi t. According to neoclassical economics, pricing is a crucial means by which markets function; thus, we use

land rent to represent the marketization of land rental and analyze the effect of reference points in this paper.