Can Crop Insurance Market Benefit Land Rental Market by Mitigating the Inverse-Relationship Concern

China is attempting to increase average farm size for relaxing laborers from land, however, the potential farm land size and productivity Inverse Relationship (IR) is triggering an intensive debate. As the China s agricultural insurance market has grown rapidly in recent years, the purpose of this study is to investigate whether the insurance can be a tool for mitigating the IR. We first model how risk causes IR. The finding brings an additional layer to the existing literature: a constant relative risk averse farmer still suffers from IR due to the Income Share Effect. When farm land size increases, the share of risky farm income rises, result in farmers to be more conservative, which causes efficiency loss. With insurance scheme, the lost productivity is recovered. A large-scale filed survey data is employed to test theoretical findings. Results show that, for farmers without insurance, the IR does exist. As land size increases 1 mu, the productivity significantly decreases 0.5 jin/mu, which is 4.5% decrease in total production if the government wants to increase average farm size from 10 mu to 100 mu. For the farmers with insurance purchase, the lost productivity is fully recovered as the theoretical model predicted and IR disappears. Acknowledgement : I am extremely grateful to my advisors Michael R. Carter and Stephen R. Boucher for invaluable discussions, guidance, and support. I also thank Danie A. Sumner, Jikun Huang, Wuyang Hu, Kevin Novan, Meilin Ma for helpful comments, as well as seminar participants.I would like to express special thanks to researchers at China Center for Agricultural Policy (CCAP) as well for their great efforts in conducting field surveys and collecting first-hand household data used in this study.