Farm Subsidy and Farmland Cash Rent under Rapid Urbanization: Evidence from Chinese Farm Household Panel 2004-2013

Abstract

Individual farmers have been entitled to lease farmland in China since 2003. During the same period, China has undergone a rapid urbanization, causing farmers to leave their lands. In 2004, the government introduced farm subsidies nationwide to encourage farming. This paper represents the very first attempt to examine the impact of farm subsidies on farmland cash rents in China. We construct a farmland rental model to account for imperfect competitions due to insecure property rights. This model is estimated using information from 5,041 households in China over the 2004-2013 period. Estimation results show that farm subsidies have a positive and statistically significant impact on farmland rents. The incidence of farm subsidies on farmland rents is estimated to be 0.45, which suggests that farmland tenants capture 55 percent of the subsidy, leaving 45 percent for landlords. This implies that farm subsidy policies exhibit substantial distributional effects. In addition, urbanization and market returns are also found to have a positive relationship with farmland rents, which is consistent with previous literature. Acknowledgement : Financial support of the NSFC (National Natural Science Foundation of China)-CGIAR (Consultative Group for International Agricultural Research) Program is gratefully acknowledged.