Risk Coping and Land Security in Rural China Dan Wang Center for Chinese Agricultural Policy Chinese Academy of Sciences 03/25/2015 1

Motivation Limited options of risk coping strategies in rural China: Social security system: not much Financial market: incomplete Migration: young, male and healthy Land rental: richer areas Land reallocation With development of other markets, benefits form land reallocation go down. 2

Land Tenure in Rural China Small-scale (SS): affect only households with demographic changes large-scale (LS) land reallocation: affect everyone in village Fairness, efficiency and risk coping (Burgess (1998), Kung (1994)) Evolution of land policy: 1984: Household Responsibility System (15 years) 1993: Land contract extended (30 years) now: No reallocation. 3

Contribution Lack of evidence of the impact of LS as a risk coping strategy on labor supply and household welfare. (Yao, 1996; Dennis Yang, 1997) Unique data set collecting detailed information of LS and SS from 96 villages. Land tenure is endogenous 4

Identification of Land Security Kung (2011): LS and SS, villages tend to rely on one way or the other, rarely the mix. use three sets of exogenous variables as IV i.Village land endowment; ii.Transaction costs variables: number of households, number of plots, village topography variables (the percentage of paddy land and the percentage of plain land); iii.Number of party secretaries since HRS is used as a proxy for pressure from the state. 5

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Main results Illness increases the probability of both local employments and migration. Death in the previous year has no significant effects on non-farm employments. LS has some mitigation effects on migration. LS-villages tend to have less migration than SS-villages. Households in LS-villages are more likely to resort to land rental market as a risk- coping strategy than in SS-villages When there is illness in the last five years, both migration and LS are effective consumption smoothing strategies. Land rental market, on the other hand, is not important. LS plays an important role in income and consumption smoothing, but when migration and land rental market exist, the importance of LS will go down. 7

Theoretical model Two-period household model Step 1: Closed agricultural economy Step 2: Add in non-farm labor market Step 3: Add in land rental market 8

Household model: 1 st period 9

Household model: 2 nd period 10

Households Maximize Expected Utility 11

Add in Non-farm Sector 12

Solve the Model 13

14 Figure 1: FARM ABILITY AND HOUSEHOLD WELFARE IN A CLOSED AGRICULTURAL ECONOMY

Add in Land Rental Market and Labor Supply Risk 15

16 Figure 2: FARM ABILITY AND HOUSEHOLD WELFARE WITH LABOR SUPPLY SHOCK AND OTHER MARKETS

Data Development Research Center (DRC) Household Survey in households, 96 villages, 48 townships, 12 counties, and 6 provinces 17

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Empirical Specifications: LS on Employment with Labor Supply Shock 19

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Empirical Specifications: Effect of Risk Coping Strategies on consumption 22

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Alternative Specification 25

Main results Illness increases the probability of both local employments and migration. Death in the previous year has no significant effects on non-farm employments. LS has some mitigation effects on migration. LS-villages tend to have less migration than SS-villages. Households in LS-villages are more likely to resort to land rental market as a risk- coping strategy than in SS-villages When there is illness in the last five years, both migration and LS are effective consumption smoothing strategies. Land rental market, on the other hand, is not important. LS plays an important role in income and consumption smoothing, but when migration and land rental market exist, the importance of LS will go down. 26

Thank you! 27