Department of Agricultural and Resource Economics
University of California Davis
Hazards of Expropriation:
Tenure Insecurity and Investment in Rural China
by
Hanan G. Jacoby, Guo Li and Scott Rozelle
Working Paper No. 02-007
Jamuary, 2002
Copyright @ 2002 Hanan G. Jacoby, Guo Li and Scott Rozelle
All Rights Reserved. Readers May Make Verbatim Copies Of This Document For Non-Commercial Purposes By
Any Means, Provided That This Copyright Notice Appears On All Such Copies.
California Agricultural Experiment Station
Giannini Foundation for Agricultural Economics
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forthcoming in American Economic Review
HAZARDS OF EXPROPRIATION:
TENURE INSECURITY AND INVESTMENT IN RURAL CHINA
By Hanan G. Jacoby, Guo Li, and Scott Rozelle
*
This paper uses household data from Northeast China to examine the link between investment and land
tenure insecurity induced by China’s system of village-level land reallocation. We quantify
expropriation risk using a hazard analysis of individual plot tenures and incorporate the predicted
“hazards of expropriation” into an empirical analysis of plot-level investment. Our focus is on organic
fertilizer use, which has long lasting benefits for soil quality. Although we find that higher
expropriation risk significantly reduces application of organic fertilizer, a welfare analysis shows that
guaranteeing land tenure in this part of China would yield only minimal efficiency gains. (JEL P32, Q15)
* Jacoby: The World Bank, 1818 H St. NW, Washington DC 20433 (e-mail: hjacoby@worldbank.org);
Li: The World Bank, 1818 H St. NW, Washington DC 20433 (e-mail: gli1@worldbank.org; Rozelle:
Department of Agricultural and Resource Economics, University of California, Davis, One Shields
Avenue, Davis CA 95616 and member of the Gianinni Foundation (e-mail: rozelle@primal.ucdavis.edu
).
The views expressed in this paper are those of authors and should not be attributed to the World Bank, its
Executive Directors, or the countries they represent. Financial support for the data collection was
provided by the World Bank, the Ford Foundation, Beijing, the International Development Research
Center of Canada, and Stanford University’s Graduate Research Opportunity Fund. We are grateful to
two anonymous referees for helpful comments and to Paul Glewwe for his input at various stages of this
project.
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Secure property rights are considered an important catalyst for economic growth, the argument being
that investment can only flourish when there is a reasonable chance of reaping its rewards. Reduced risk
of capital expropriation by the state historically has contributed to higher growth (Douglass C. North and
Barry R. Weingast, 1989). Today, insecurity of ownership remains a major issue in current and former
socialist economies, and fear of expropriation may even impede privatization (Raul Laban and Holger C.
Wolf, 1993). Yet, little, if any, empirical evidence exists either on how individual investors respond to
heightened expropriation risk, or on the social cost of insecure property rights. A fundamental empirical
limitation is that, even in contexts where the threat of expropriation is ubiquitous, expropriation itself is
usually a rare event, and one that is typically observed only on a macro scale.
1
In this paper, we examine the link between investment and expropriation risk using household-level
data from rural China. Under China’s current system of land management, local leaders periodically
reallocate collectively-held land among farm households in the same village. Made at the village level,
these reallocation—or expropriation—decisions vary across communities and are largely exogenous from
the individual farmer’s perspective, though the chance of being involved in a reallocation may depend on
certain household characteristics (Scott Rozelle and Guo Li, 1998; Michael R. Carter, et al., 1995).
Importantly, the timing of these reallocations is uncertain for the individual farmer. In this sense, rural
China is an ideal case-study of tenure insecurity, providing the requisite cross-sectional variation in
expropriation risk. The methodological problem, and the main innovation of this paper, is to quantify
this risk and incorporate it into a tractable empirical model of investment behavior. We do so by
performing a hazard analysis of individual plot tenures and relating the predicted “hazards of
expropriation” to land-specific investment, specifically investment in soil quality. Because the
theoretical model provides a characterization of the social cost of tenure insecurity, we can use our
estimates to assess the potential welfare gains from changes in China’s land management system.
To motivate the hazards approach, consider how one might proxy for tenure insecurity in a regression
explaining plot-level farm investment. One strategy would be to use the length of time the farmer has
held the plot, plot tenure, as such a proxy. The longer a farmer has held the plot, the more secure he must
feel about keeping the plot in the future, and the more he will invest in the plot. There are three distinct
problems with this strategy. First, actual plot tenure is a realization of a stochastic process, and so is
1
Jonathan Eaton and Mark Gersovitz (1983) make a similar point in the context of foreign investment.
Using cross-country data, Philip Keefer and Stephen Knack (1997) investigate the role of aggregate
measures of expropriation risk in growth regressions. Henning Bohn and Robert T. Deacon (2000) also
use cross-country data to examine the impact of political variables on investment and natural resource
extraction.
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determined by the luck of the draw. For this reason, plot tenure is a noisy indicator of the underlying
uncertainty facing the farmer; in other words, we have an errors-in-variables problem. Second, plot-level
expropriation risk (as opposed to realized plot tenure) may be determined by the same unobserved
variables as plot-level investment, which would lead to a simultaneity bias. For example, farmers may be
more likely to lobby against or resist reallocations of their more fertile plots and as a result hold them
longer. At the same time, farmers may invest more heavily in these more fertile plots. Third, there is a
difficulty in interpretation. Longer plot tenure may indeed imply lower expropriation risk; alternatively,
it may imply that the plot is becoming “due” for a reallocation. The question of whether expropriation
risk rises or falls with plot tenure is, in technical language, a question of whether there is positive or
negative duration dependence in the hazard rate of plot expropriation. Thus, the relationship between
investment and tenure insecurity is intimately tied to the form of the hazard of expropriation.
A number of recent empirical studies have investigated the relationship between land rights and farm
productivity or investment in various countries, but none of these studies directly examines the impact of
expropriation risk.
2
For example, since land expropriation is not important in rural Ghana, Besley’s
(1995) analysis of farm investment focuses on the impact of land transfer rights. Similarly, the work of
Feder and collaborators on the effect of land titles in rural Thailand does not directly address
expropriation risk. Because Thai farmers face little threat of eviction, the primary benefit of legal title is
in enabling households to access credit by using land as collateral. In China, banks, by law, cannot take
land as collateral and policy explicitly prohibits land sales, so our analysis puts the spotlight directly on
the impact of expropriation risk.
The plan of the paper is as follows. In the next section, we provide the institutional background on
China’s land management system, and present some evidence strongly suggesting a link between
property rights and investment in soil quality. Section II lays out a theoretical model of farm investment
in the presence of expropriation risk and derives its empirical implications. In section III, we discuss the
empirical implementation of the hazard model and section IV presents the hazard model results. Sections
V and VI discuss, respectively, the empirical strategy and results of the fertilizer demand estimation.
These results form the basis for our quantitative analysis of agricultural policy reform in section VII.
Section VIII concludes the paper.
2
A partial listing includes Gershon Feder and Tongroj Onchan (1987), Yongyuth Chalamwong and
Gershon Feder (1988), Frank Place and Peter Hazell (1993), Timothy Besley (1995), and Lee J. Alston,
et al. (1996).
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I. Institutional Background and Data
A. Land Rights and Tenure in China
While the Household Responsibility System, instituted in the early 1980’s, gave farmers clear rights
to the residual income from farm activities, reformers kept local officials firmly in control of the
allocation and general management of land resources. Most cultivated land in rural China, with the
exception of a small fraction that is still managed as state farms, remains collectively owned; none is
truly privatized. National policy proclamations provide guidance to regional and community leaders,
encouraging the extension of long-term lease rights and unconstrained transfer rights. The state,
however, has purposely provided localities flexibility in land management and has explicitly allowed
leaders the right to make periodic adjustments to household land holdings if conditions so require (James
K. Kung and Shouying Liu, 1997).
Why do local leaders reallocate land, especially if they know that there is a potentially adverse
impact on farmer investment incentives? Although there is great heterogeneity across villages, the
empirical literature has uncovered three main motivations. First, reallocations help maintain the
egalitarian distribution of land in the face of household-level demographic change, including new
household formation (James K. Kung, 1994). Second, reallocations help eliminate the growing
inefficiency in the distribution of land across households caused by demographic changes in conjunction
with poorly functioning land rental and labor markets (Guo Li, 1999; Dwayne Benjamin and Loren
Brandt, 2000). Third, village leaders use land reallocations as a “carrot and stick” to fulfill output quotas
and collect taxes (Rozelle and Li, 1998).
Land in most villages can be divided into two types, private plots (ziliu di) and collectively
controlled land (jiti di), although collective land predominates (Yuk-shing Cheng and Shuki Tsang,
1995). While in theory the collective still ultimately owns the private plots and farmers cannot sell them,
most village leaders do not intervene in decisions on private plots. Farmers nearly always have rights to
residual output, unfettered rental rights, and enjoy a high degree of tenure security. Collectively
controlled land is of three nationally recognized types: ration land (kouliang tian), granted to farmers to
meet household subsistence requirements; responsibility land (zeren tian), granted to farmers on the
condition that they deliver low-priced grain and cotton quotas to the state; and contract land (chengbao
tian), which village leaders lease to farmers for a fee, but for an uncertain duration (Heng Liang, 1993).
