Farmland Lease, High-Rent Threat, and Contract Instability: Evidence from China

We develop a game theoretical model to understand the stability problem in the farmland lease contract in China where most land-owners are small landholders. When these small land-owners lease their land to large landholders, they take a high-rent-threaten strategy that can result in contract instability. Results obtained from doubly-robust estimation used on randomly selected interview data from 1611 households in nine provinces in China indicate that, (1) compared to those land-owners who transfer the farmland to the small landholders, the land-owners who transfer the farmland to large landholders will have a higher 46.57% possibility to ask for higher rent in the contract duration (high-rent-threaten strategy); (2) land-owners’ high-rent-threaten strategy will increase 4.49% possibility of the contract breaks; (3) in general, compared with those contracts that the transfer objects are not large landholders, the contracts that the transfer objects are large landholders has a 6.81% higher possibility of breakdown; (4) if we isolate the influence of land-owners’ high-rent-threaten strategy on the contract break, the contracts that the transfer objects are large landholders still has a 5.65% higher possibility of breakdown. The empirical results entail that, comparing to the stable farmland lease contract between two small farmers, contract instability can arise endogenously when large landholders lease farmlands. We conclude that a suitable rent control regime may be necessary to promote a large scale farmland transfer in China.