Specialization without Regret: Transfer Rights, Agricultural Productivity, and Investment in an Industrializing Economy

Abstract

In China, where collectives own farmland but farmers may hold use rights to the land, a case can be made for a property rights system with incomplete security of tenure but with strong transfer rights, which permit specialization without regret - so farmers can recoup the value of an investment even if they exit farming. A number of studies have examined the effects of secure tenure on agricultural investment and productivity. Carter and Yao also study the importance of rights to household residual income and land use being transferable. Contemporary China - where industrialization has spread rapidly, if unevenly - is a good place to study the economic effects of transfer rights as well as conventional security of tenure. Village collectives formally own land in China, so there can be no individual land sales, but farmers are sometimes entitled to sell their rights to use the land allocated to them under the household responsibility system. Whether a household has secure tenure depends on whether its landholding will be reduced if the household population declines, whether the landholding will be increased if the household population increases, and how frequent average land adjustments are under the household responsibility system. Analyzing panel data for a sample of farm households, Carter and Yao study the investment regret mitigation effect, which results when greater transfer rights make households more willing to invest because they are less likely to regret such investments when they can recoup the investment value even if they exit farming. Carter and Yao find that transfer rights may be especially important in an industrializing economy. A property rights system with incomplete security of tenure but with strong transfer rights that permit specialization without regret - so farmers can recoup the value of an investment even if they exit farming - may have much to recommend it. This paper - a product of Rural Development, Development Research Group - is part of a larger effort in the group to study the determinants and impact of property rights systems and land tenure regimes in the process of development. The authors may be contacted at carter@aae.wisc.edu or yyao@ccer.pku.edu.cn.