The demonstration effect of transactions between strangers on those between acquaintances: evidence from land rentals in rural China

ABSTRACT

Over the last decade, introducing outer village lessees has been an important approach to increasing the marketization of land rentals in rural China. However, with large numbers of informal features among acquaintances, the effect of introducing outer village lessees is ambiguous. In this paper, data from the 2015 China Household Finance Survey are used to analyse the demonstration effect of land rentals between strangers on those between acquaintances, and land rent is used to represent the marketization of land rentals. The estimated results indicate that with the emergence of outer village lessees, lessors transacting with acquaintances are more likely to obtain high land rents and to rent out farmland for profit. Evidence shows that profit motives are the key pathway by which the presence of outer village lessees affects land rents. The analysis using the sample of lessees supports our findings. Our analysis implies that the demonstration effect exists in land rental markets, and also provides a feasible instrument for promoting market-oriented land rentals between acquaintances.

KEYWORDS:

• Land rentals
• acquaintances
• land rents
• demonstration effect
• marketization

JEL CLASSIFICATION:

• Q13
• O12

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Source: Authors’ calculations using the Statistical Annual Report on Rural Management in China (SARRM).

² 1 mu = 1/15 ha, $1 = 7.09 yuan.

³ Marketization is a restructuring process whereby state enterprises operate as market-oriented firms. The marketization of land rentals in this paper represents the status changing from relation-based transactions to market-oriented transactions. Price is used to measure the marketization of land rentals because the market functions through pricing, and relation-based or informal land rentals are always accompanied by low land rents (Ma et al. 2013; Wang, Riedinger, and Jin 2015). With the increase of land rents, market orientation will dominate relation orientation.

⁴ It should be noted that land rentals between acquaintances are defined as those within the village in this paper, as noted by Wang, Riedinger, and Jin (2015), because villages in rural China are commonly small and feature close social relationship networks, implying that transaction partners in the same village have closer relationships than those from different villages or regions.

⁵ The land transfer rate equals to the proportion of the transferred land size to the total contacted land size distributed to farm households.

⁶ In our theoretical framework, $E$ is assumed to have a positive marginal effect on the production of $Z_i$. It is obvious that the development of land rental markets is conducive to increasing land rents and lessors’ income from participation in land rentals.

⁷ Except for the emergence of outer village lessees at the village level, the rental transactions in the villages nearby also can affect the rental transactions conducted by acquaintances. However, our data cannot distinguish the demonstration effect of other villages because the random selection of villages cannot ensure that there exist two villages close to each other, and we cannot distinguish whether these two villages exist in our sample. However, referring to the theory of social interaction, the interactions within small communities have more significant effects than in large communities (Dixit 2004), implying that it is better to conduct the analysis within a village. In addition, we consider whether it is suitable to use the sample within the town or county to represent the demonstration effect outside the villages, but we still cannot ensure that these villages are close to each other. It is obvious that using the sample within a town or county to distinguish the demonstration effect is likely to result in serious bias. For the above reasons, our analysis focuses on the demonstration effect within the villages, which does not cause any confusion.

⁸ According to Locke and Latham (2004), motivation refers to internal factors that impel actions and to external factors that can act as inducements to action. Maslow (1943) proposed that physiological needs and the consummatory behaviour involved with them serve as channels for all sorts of other needs. Pearl (2009) argued that an act can be predicted and can serve as evidence for the actor’s stimuli and motivation. In other words, motivation determines people’s actions, and people’s consummatory behaviour serves as the channel for motivation, similar to the way in which profit motives serve as the pathway by which the demonstration effect affects lessors’ behaviours.

⁹ For simplification, the results of balance check for each control variable are not reported.

¹⁰ AI robust standard error in Table 5 means Abadie-Imbens robust standard error, which is advanced by Abadie and Imbens to avoid the wrong standard error estimated by the traditional PSM.

Additional information

Funding

The study is supported by the keystone policy research project of National Natural Science Foundation of China [71742003], the major project of National Social Science Foundation of China [19ZDA115] and the project of National Natural Science Foundation of China [71773054].