Land Tenancy Contract Structure and Its Economy Impact
Land rental market plays a pivotal role in increasing farm scale in developing countries. Therefore, there are a
growing number of literatures focus on identifying the determinants of land market participation and qualifying the
welfare effects of land tenancy. Previous theory suggests that the reason why China land rental markets function
not vary well at least including three approaches: insecure property rights, imperfect labor and credit markets and
missing social security system. In contrast to the large body of theory, however, evidence on the determinants of
land tenancy contractual structure is limited and typically focuses exclusively on the compensation scheme,
namely on the agreed transfers between the parties.
The purpose of this paper is to present new evidence on the contract type jointly with contract duration, a key
and yet neglected dimension of land lease contractual structure. Analyzing contract structures may contribute to
the literature for two reasons. First, both small scale and insecure property rights are regarded as the main cause of
agricultural underinvestment and inefficiency. So it is widely believed among policy makers or agricultural
economists that one alternative policy option is to rely on land rental market function to raise agricultural scale
efficiency and competiveness. However, the function of land rental market is still debatable. If we can clarify the
edges and impacts of different contract choices, it might be a contribution to theory. Specifically, in a
principal-agent framework where the agent works with long-lived assets, contract duration determines the agent's
stake in future production and hence the incentive to undertake unobservable investments. Evidence on the
determinants of duration can thus shed light on the extent to which incentives for unobservable investments are
provided in practice. Second, because both contract duration and the contract types are used to provide incentives
within the same contract, studying them jointly is key to providing an accurate picture of the determinants of
contract form. Focusing on one dimension only can, in contrast, mislead the interpretation of the evidence.
We collected the land lease data via a field survey that conducted by China Agriculture Research System
(CARS) during the 2013/14. This survey was purposefully conducted in Coastal (Shandong Province), Centre
(Henan Province), and West (Shaanxi and Gansu Province) of China. A supplemental questionnaire administrated
to specialized households with agricultural income contribution over half to total income. Especially, Apple
production in the sample area remains the important source of income overall. The field survey involved in land
transactions elicits information on contractual details, current occupation and income levels by the respondent. A
multi-stage sampling procedure was used to select counties, sub-divisions and farm households. The first stage
was the deliberate selection of 122 counties in 4 northern provinces, namely Shandong, Henan, Shaanxi, and
Gansu. To ensure all apple producers have the same probability of choosing in the sample, the Probability
Proportional to Size sampling method was used. Overall, 12 counties were randomly selected in the seven
provinces and 1079 samples were selected for interview. Via face-to-face questionnaire interview, detailed
information on land transaction and production are collected in 2014.
Statistical evidence indicates that 21.13% of total sample rented in or rented out land, of which 29.16 choose
short-term contract. Compensation scheme of land lease mainly includes fixed rent (92.19%) and gift (7.81%), and
there is no share-crop case observed.
Our theoretical analysis suggests that the duration of the contract determines incentives for unobservable
investment effort. Long-term contracts give the tenant a stake in future output and therefore the incentive to
undertake unobservable investment that increases output in future periods. In addition, long-term contracts allow
the tenant to smooth consumption when he faces imperfect credit markets and they also entail lower transaction
costs as they do not need to be negotiated each year. When committing to a long-term contract, however, the
landlord loses the flexibility to adjust to changes in the environment and forsakes the opportunity to use eviction
threats. Contract theory also indicates that fixed rent contracts, whereby the tenant retains all the output and pays a
fixed rent to the households who rent out land, provide stronger effort incentives than gift or sharecropping
contracts.
Our empirical findings provide practical evidence to support the theoretical predication. The estimation results
of Logit model suggest that social relationship between landlord and tenant, tenant family income, and non-farm
employment opportunity are the main determinants of contract structure choices. Furthermore, the results of OLS
and Instrumental Variable approaches indicate Long term / fixed rent contract is the most common and most
efficiency contract structure to encourage agricultural long time investment and improve land productivity.
This paper analyzes the empirical determinants of contract length, a key and yet neglected dimension of
contractual structure