Efficiency of Land Allocation through Tenancy Markets: Evidence from China

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Tenancy markets provide an opportunity to trade land between labor-scarce farmers, that is those who engage in off-farm employment, and land-scarce farmers, that is those who want to expand agricultural production. For emerging middle-income countries where rural to urban migration is active, facilitating a well-functioning tenancy markets is important to increase farmer's income and improve agricultural productivity. Although the existing literature argues that high transaction costs are the major source of market failure, the nature of transaction costs is seldom explored. We hypothesize that the search and negotiation costs and the expected loss of land, due to weak property rights, are the major components of the transaction costs in tenancy markets and that they lead to smaller numbers of rental transactions. We also find empirical evidence in support of these hypotheses using farm household data from China.

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