UC Davis Agricultural and Resource Economics

Huang Chen, University of California, Davis

Practice Job Talk: Agricultural Risk, Insurance, and the Land- Productivity Inverse Relationship

Date and Location

Tuesday, October 31, 2017, 4:10 PM - 5:30 PM
ARE Library, 4101 Social Sciences and Humanities

Abstract

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, the purpose of this study is to investigate whether the insurance boosts large farms’ productivity more than smaller farms’, so that the establishment of an insurance market can complement the development of land markets, and mitigate the concern of IR. To answer this question, the first part of this study analyzes the role of risk in affecting productivity. A general farm profit model is developed and the result brings an additional layer to the conventional conclusion in literature about the risk and the IR: a constant relative risk averse (CRRA) farmer still suffers from IR problem. The second part of the model shows that insurance can indeed boost productivity, and the impact of the insurance for large farms is bigger than the small farms. In the last theory section, three explanations of IR are decomposed and compared to see how their different roles in affecting productivity. The theoretical findings are econometrically tested using a large-scale filed survey data from 6 provinces in northern China. Insurance policy is employed as IV for dealing with the endogeneity of farmers' insurance purchase behavior. Results show that insurance can significantly boost productivity by 18%, and substantially mitigate the IR by 94%. Policy implications for land and insurance market developments are discussed.

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