Abstract
Prices are effective signals of many market conditions, while underpricing of tilled land in rural China poses a dilemma to this common sense. Using n = 191 imputed contracts in rural China, this paper aims to investigate the role of ambiguous property rights in the context of agricultural reforms. Using rank statistics, several candidate variables in the transaction costs function fc(•) were identified, including BMI (Body Mass Index), Knowledge, Subtraction and Farming Experience. The results show clear evidence for underpricing to restrain competition under ambiguous property rights. More illuminatingly, non-parametric regression analysis specifies a well-founded transaction costs function: increasing Subtraction by one unit increases transaction costs by the equivalent of US$513.40, while a one-year increase of farming experience reduces transaction costs by US$116.20, ceteris paribus. It concludes that social costs behind underpricing are detrimental to China’s rural reform. This study contributes to economic theory, with important implications for policy makers. To encourage smooth transmission of price signals, it is important to consider farmer characteristics and develop professional farmers.
Highlights
China’s land reforms have led to a situation of ambiguous property rights, and agricultural land use driven by a transferal fees for tilled agricultural plots
Focusing on the typical fact that land use in rural China does not maximize land rent and the right to exclude is unclear for farmers; it adds support for the use of transaction costs theory in the context of ambiguous property rights
It is demonstrated that a naïve economic agent operating under ambiguous property rights will default to windfall behavior
Summary
China’s land reforms have led to a situation of ambiguous property rights, and agricultural land use driven by a transferal fees for tilled agricultural plots The impacts of these reforms have been well-studied, though relatively little attention has been focused on the structural economic inefficiencies related to transactions costs and competitiveness. McGee’s Outright Purchase Hypothesis was used to explain the well-known 1911 anti-trust case of Standard Oil Company’s pricing strategy to gain monopolistic advantage and market control to effectively reduce competition [1]. According to this hypothesis, there are sufficient future gains available to enable predatory mergers and acquisitions by permitting former owners to share in the monopoly windfall.
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