Land Rental Market and Rural Economic Development

Abstract

This study investigates the role of the land rental market in rural economic development with the province Chongqing, China, as case study region. The study focuses on the question participation in the land rental market can improve agricultural production efficiency and alleviate income inequality in rural areas. Finally, the factors that affect rental market participation of farm households are examined.<br /> A stochastic frontier approach was employed to measure effect of the land rental market participation on agricultural productivity. Two competing hypotheses are tested: 1) Less efficient farm households rent out land to more efficient farm households and agricultural productivity is improved; 2) More efficient farm households rent out land and work off of farm, which results in lower agricultural productivity. The results showed that both of these hypotheses are possibly true, but more efficient farm households are more likely to rent land rather than rent it out, which implies the productivity enhancive effect of land rental market. <br /> To investigate the impact of land rental market development on rural income distribution, firstly the income inequality was decomposed to measure the contribution of land rental income to total income inequality and the interactions between land rental income and other income sources. Then, relying on the inequality index calculated, a fixed effect model was used to investigate the impact of participation in the land rental market and land rental market imperfection on income inequality index. The results showed that contribution of land rental income to total income inequality is increasing over the observation period. And participation in land rental market may reduce income inequality, given an imperfect land rental market. <br /> Deriving from a farm household model, farm households’ supply and demand decisions in land rental market were explored. The multinomial Logit model is used to examine factors that influence farm household participation probability in the land rental market. Tobit models are employed to measure the impact on the quantity of renting and renting out by farm households. Results show the importance of off-farm work wage and off-farm labor market imperfection in defining the rental behavior of farm households: it prevents farm households from renting land and encourage them to rent out. Simulation results show that rising off-farm work wages and participation rate in the off-farm labor market lead to a lower equilibrium land rent in a closed economy.