UC Davis Agricultural and Resource Economics

AAEA Presentation by Huang Chen: Agricultural Risk, Insurance, and the Land - Productivity Inverse Relationship

July 26, 2017

Advisor: Michael Carter and Steve Boucher
Fields: Development Economics, Agricultural Economics, Water Resources and Climate Change

Time: Tuesday, August 1st, 1:15 pm – 2:45 pm
Location: River North

China is attempting to improve upon existing land entitling policy to stimulate rural land aggregation trend for absorbing rural labors to support urban development. However, the potential negative impact of land size increase on farm productivity, i.e. the Inverse Relationship (IR), is triggering an intensive debate. Given the fact that China’s agricultural insurance market has grown rapidly in recent years, my main research interest is to investigate how the development of insurance markets affects the land rental market. Particularly, my job market paper addresses this question: whether the insurance boosts large farms’ productivity more than smaller farms’. The study first analyzes the role of risk in affecting productivity. A farm profit model is developed and the result brings an additional layer to the conventional conclusion in literature: a constant relative risk averse farmer still suffers from IR. Furthermore, the model shows that insurance can recover productivity, and the impact for large farms is bigger than small farms. The theoretical findings are econometrically tested using a large-scale filed survey data from 6 provinces in China. Insurance policy is employed as IV for dealing with the endogeneity of farmers' insurance purchase behavior. Results show IR does exist and insurance significantly boost productivity by 20%. Moreover, insurance substantially mitigates 95% of IR problem. The result provides a meaningful insight for policymakers to think about the land market development: a successful promoting of land markets should not be an independent policy attempt; it should involve different markets to develop simultaneously, such as insurance markets.

 

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