The Impact of Farmland Transfers on Agricultural Investment in China: A Perspective of Transaction Cost Economics

• DOI: http://doi.org/10.1111/cwe.12269
• Author: Cuiping Ma,Liangliang Gao,Dingqiang Sun
• Date: 01 January 2019
• Published date: 01 January 2019

China & World Economy / 93–109, Vol. 27, No. 1, 2019

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©2019 Institute of World Economics and Politics, Chinese Academy of Social Sciences

*Liangliang Gao, Associate Professor, Rural Development Institute, Chinese Academy of Social Sciences,

China. Email: gaoll@cass.org.cn; Dingqiang Sun (corresponding author), Associate Professor, College of

Economics and Management, Nanjing Agricultural University, China. Email: dqsun@njau.edu.cn; Cuiping

Ma, Associate Professor, Rural Development Institute, Chinese Academy of Social Sciences, China. Email:

macp@cass.org.cn. The authors gratefully acknowledge nancial support from the National Natural Science

Foundation of China (No. 71473122), the National Social Science Foundation of China (Nos. 17BJY010

and 17CJY032) and “A project Funded by the Priority Academic Program Development of Jiangsu Higher

Education Institutions (PAPD).”

The Impact of Farmland Transfers on Agricultural

Investment in China: A Perspective

of Transaction Cost Economics

Liangliang Gao, Dingqiang Sun, Cuiping Ma*

Abstract

There is growing concern that farmland transfers lead to less agricultural investment,

which may adversely affect agricultural productivity growth in China. Prior research has

primarily focused on the differences between owned cultivated land and rented plots, but

little is known about how farmland transfers between relatives, which are popular in rural

China, specically affect agricultural investment. In this paper, we present a conceptual

framework of transaction cost economics to compare different contracting strategies in

China’s farmland rental markets. As farmland rental markets in China are immature, land

transfer between relatives establishes bilateral governance, which has the advantage

of addressing the opportunistic activities of both parties and can ultimately increase

investment by tenants. Based on data from two waves of household surveys, we empirically

examine the impact of bilateral governance on the application of organic fertilizer, an

indicator for agricultural investment. Our ndings show that apart from economic factors,

kinship is important to the functioning of farmland rental markets in rural areas.

Key words: agricultural investment, farmland rental market, governance structure,

transaction cost economics

JEL codes: D23, Q12, Q15

I. Introduction

Farmland rental markets have grown rapidly in rural China since the 1990s. According

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©2019 Institute of World Economics and Politics, Chinese Academy of Social Sciences

to nationwide household surveys, the proportion of farm households that rented land

increased from 6.9 percent in 2000 to 19.3 percent in 2008, at an annual growth rate

of 13.7 percent (Huang et al., 2012). Recently, under several government incentive

programs, such as official farmland transfer platforms and subsidies, farmland rental

markets in rural areas have signicantly developed, inducing more land transfers among

farmers and stimulating the expansion of farm size in China. Increased farmland rental

activity is playing an important role in transforming China’s agricultural sector from a

small-scale production system into a market-oriented modern agricultural sector.

However, there is growing concern that farmland transfers may adversely affect

agricultural investment and consequently threaten long-term agricultural productivity

growth in China. Several studies have shown that tenants may have less incentive to

invest in rented plots (Yu et al., 2003; Cai et al., 2008; Gao et al., 2012). For example,

Gao et al. (2012) showed that farmers tend to apply less organic fertilizer, measured as

an indicator of agricultural investment, to rented plots than to their own cultivated land.

The low investment in rented plots may impose a considerable challenge for China to

maintain long-term growth of agricultural productivity, especially in the context of rapid

expansion of farm size via rental markets.

Prior research examining the effects of farmland rental markets on agricultural

investment in China has generally focused on the differences between owned cultivated

land and rented plots (Cater and Yao, 2002; Gao et al., 2012). However, a unique feature

of China’s farmland rental markets often does not receive wide attention and may lead to

different effects on agricultural investment. In rural China, farmland rental often occurs

between relatives rather than strangers. For example, several studies have reported that

approximately 50 percent of farmland transfers occurred between relatives (Zhong

and Wang, 2003; Chen and Ni, 2006). Moreover, such farmland transfers are often

applied without contracts or with informal oral contracts (Ding and Zhang, 2008; Guo,

2009). Unlike farmland rental between strangers, renting land from relatives provides

tenants greater security as a result of their kinship and social linkage, and therefore may

encourage tenants to invest more in rented plots.

In this paper, we examine the effects of farmland transfers between relatives on

agricultural investments from the perspective of transaction cost economics (TCE). We

seek to understand why farmland transfer between relatives is popular in rural China and

examine its potential impact on agricultural investment. TCE is a good tool to analyze

China’s rural farmland rental markets as they experience rapid development and accrue

high transaction costs in terms of searching for partners, negotiating rental contracts, and

enforcing transactions. This study is the rst to apply TCE to farmland rental markets in

rural China, enabling a comprehensive understanding of farmland transactions.