This project theoretically illustrates and empirically tests the causal effects of property rights institutions on households' labor allocation decisions and other market outcomes. In particular, the project focuses on rural China, where land is collectively owned and frequently reallocated among households under the Household Responsibility system. The project argues that the tenure insecurity arising from such a land-holding system may have led households to sub-optimally allocate labor to off-farm employment, discouraged the development of the land leasing market and the agricultural labor market, and negatively affected rural labor's income and productivity. In order to identify these effects, the project relies on a natural experiment brought about by a legal change in China in 2002, which prohibits all land readjustments by village officials throughout farmers' 30-year term of land usage. By exploiting the cross-village variation in pre-reform land tenure security, the project attempts to isolate the causal effects of the property rights reform in a model with both time and village fixed-effects.
In addition, the project investigates the motivations for villages to conduct periodic land reallocations despite the potential efficiency loss. Three alternative hypotheses on the potential benefits of frequent land reallocations are generated from the project's theoretical framework: substitution for dysfunctional land and labor markets, income redistribution, and social insurance. The project will test between these hypotheses by relating the characteristics of the village, its residents, or its government officials with the village's specific pre-reform land reallocation policies. Based on these results, the project will use the same method described in the previous paragraph to further examine the effects of the land reallocations on other socioeconomic outcomes, such as on income volatility or inequality across households.
Last but not least, the project studies the collective institutional decision-making process in Chinese villages. In examining villages' decision over when to reallocate land, the project attempts to answer two questions. First, do individual households take the long-term effects of tenure insecurity into consideration when they decide on when to reallocate land, or are their decisions overwhelmingly dominated by personal short-term interest? Second, if each household is fully rational, do they tend to reach collectively rational decisions that are optimal for the group?
This project advances our understanding of development economics in several ways: First, it is one of the first that identifies the causal effects of property rights on households' labor decisions, especially in a rural context. Showing the effects of property reforms on households' participation in land-leasing and labor markets, the project also improves understanding on the market formation process of developing countries. Second, it is the first project that attempts to seriously evaluate the non-efficiency-related outcomes of property reforms. By illustrating and identifying the potential redistribution and social insurance values of collective ownership, the project allows more comprehensive evaluations of various property rights institutions, and also sheds light on why community-based ownership of land, despite its efficiency costs, is still so prevalent among many developing countries.
In addition, the examination of villagers' collective choice in land reallocation policies also supplements previous studies of group rationality, especially in the context of institutional design and choice. This provides information and insights to policy makers on the design of future property rights reforms.
Finally, the findings of the project also contribute specifically to the debate on whether China's huge rural labor surplus, which has shaped the country's comparative advantage in trade and spurred its rapid growth over the past 30 years, has reached a limit. By providing evidence that excessive labor could still be trapped inefficiently in the agricultural sector due to land tenure insecurity, the project suggests that China can further increase labor mobility and unleash its labor potential through property rights reforms. Such findings inevitably have important implications for the economic standings and the development strategies of both China and her trade partners. However, the project also cautions policy-makers about the potential costs of such reforms, and suggests that property reforms be preceded by the development of alternative social safety networks for the rural population.
Land is fundamental to the lives of rural households. Although most economists consider private property and secure land tenure essential for economic development, communal tenure, where a group collectively owns land and frequently redistributes use rights between members, continues to exist in many developing countries. This project provides a rationale for why certain communities might prefer such tenure arrangements. This project studies rural societies' optimal land institutional design under communal tenure. I find that frequent land reallocations with a labor-contingent rule of allocation, although inefficiently trapping labor in agriculture, can be overall welfare-improving compared to secure tenure. This is because land reallocations improve agricultural production efficiency by substituting for imperfect markets in ensuring efficient land transfers, and perform an important function of wealth redistribution within the village I rely on a legal reform in 2003 that stopped land reallocations in all Chinese villages, and adopt a difference-in-difference strategy to identify the causal effects of reallocations. On average, the elimination of land reallocations increased off-farm labor and household per capita net income by 8% and 7% respectively. However, this came at the cost of an around 5% decrease in total agricultural output and a significant jump in income inequality. The project makes significant contributions to our understanding of how property institutions affect economic outcomes: Past empirical studies have provided much evidence on the effects of property rights on production investment or credit access. This project adds to a relatively newer literature on the effects of property rights on households' labor decisions. The project contributes to this literature by not only identifying the causal effects of land tenure on household labor allocation, but also providing a theoretical explanation for why labor inefficiency exists under rural communal tenure. I argue that, when information is asymmetrical, policy designers have incentives to allocate land based on households' labor decisions, which creates distorted incentives for households to over-supply labor to agriculture. In addition, the project goes a step further by conducting a more comprehensive welfare evaluation of communal tenure. I argue that the very reason why policy-makers create such institutions is because they reduce income inequality and improve overall agricultural productivity under imperfect markets. In other words, the existence of labor inefficiencies alone may not constitute sufficient reason to establish private property rights. The findings of the project on the potential costs and benefits of land tenure security reforms provide information and guidance for all future reforms with similar contexts. At the same time, the project contributes to the debate on whether China’s huge rural labor surplus, which has shaped the country’s comparative advantage in trade and spurred its rapid growth over the past 30 years, has reached a limit. By providing evidence that excessive labor could still be trapped inefficiently in the agricultural sector due to land tenure insecurity, the project suggests that China can further increase labor mobility and unleash its labor potential through property rights reforms. Such findings inevitably have important implications for the economic standings and the development strategies of both China and her trade partners. However, the project also cautions policy-makers about the potential costs of such reforms, and suggests that property reforms be preceded by the development of markets and establishment of alternative social safety networks for the rural population.
