Many economic studies find that productivity in agriculture remains remarkably low in most developing countries, and this can account for most of the overall differential in labor productivity between rich and poor countries. Other works have suggested that the relative inefficiency of agriculture in poor countries may be a result of frictions that produce a misallocation of productive resources. In this paper, Elaine Liu and her collaborators, AV Chari, Shing-Yi Wang and Yongxiang Wang examine the extent to which this misallocation can be rectified by reducing transaction costs in agricultural land markets. We focus on one specific reform that was announced at the central level in China in 2003, namely, the Rural Land Contracting Law (RLCL). The RLCL increased legal protections for land contracts and specifically granted farmers legal protections for leasing contracts over agricultural land.

In our analysis, we exploit the fact that different provinces implemented the RLCL in different years after 2003, and compare outcomes for the same agricultural households before and after the RLCL was implemented in their province. The timing of the implementation varies by province but seems unrelated to conditions in the rural economy, allowing us to separate out the effects of the reform from other aggregate changes taking place over time.

Finding

We find evidence of a significant increase in land rental activity in rural households following the reform. Specifically, after the reform, the amount of land leased increased by 7%. This indicates that the property rights reform allowed households to adjust their land holdings through renting. Next, we examine the effect of the property rights reform on aggregate agricultural productivity and output. The findings show that at the village level, the land reform has significantly increased overall output and the aggregate productivity by approximately 8% and 10%.

While land renting transactions and agricultural productivity have increased, we are specifically interested in looking at the reallocation of land across farmers and in quantifying the extent to which market exchanges of land among farmers can account for the increase in output. We find evidence that the reform led to an increase in the amount of land cultivated by more productive farmers, while reducing the amount of land cultivated by relatively less productive farmers. A simple decomposition suggests that nearly 88% of the observed increase in aggregate productivity can be attributed to input reallocations associated with the reform.

We also observe that the amount of hired labor increases on relatively more productive farms but declines on less productive farms, suggesting a within-village reallocation of labor. This isn’t surprising given that labor is a complementary input to land.

Policy Implication

In the context of agriculture in many countries beyond China, ownership and use rights over land are often poorly defined and this plausibly affects the ability and incentives of farmers to transact in land. Our research demonstrates that households cannot fully solve the contracting problem in informal ways and that legal protections for exchange rights are important for efficient allocation of land across farmers and of labor across sectors and space. Overall, our results establish both the importance of land misallocation as a source of productive inefficiency in the agricultural sector, as well as the positive role that well-defined property rights can have in ameliorating the problem.

This project is funded by Economic Science and Research Council (ESRC). The article is forthcoming in the Review of Economic Studies.