Price Signal of Tilled Land in Rural China: An Empirically Oriented Transaction Costs Study Based on Contract Theory

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.

Keywords

• land use
• new institutional economics
• imputed contract