Interdependent investments in attached and movable assets under insecure land rights

Abstract

The literature concludes that insecure land rights cause farms to make suboptimal capital investment in attached assets, but not in movable assets, implicitly assuming attached and movable assets to be independent. However, the two asset types can be interdependent because the operational efficiency of movable assets, such as farm machinery, typically depends on field conditions, such as land fragmentation. Thus, investment in attached assets may affect investment in movable assets via farm infrastructure. I develop a conceptual model to explain why tenure insecurity may lead a farm to under-invest in attached assets and over-invest in low-efficiency movable assets relative to the secure-land-right scenario. To quantify the economic significance of investment inefficiency, I collect unique survey data on large-scale farms, for which machinery is of particular importance in production, in Southwest China where land tenure remained insecure in 2016. Simulations based on the large-farm survey data suggest that the suboptimal investment occurs given fairly small probabilities of losing some farmland and results in considerable economic losses. The findings have important policy implications regarding land reforms and farm infrastructure in developing economies.