Transaction Costs in Tenancy Relationship, Fragment Level of Land Property Rights and Agricultural Development

Abstract

This paper analyzes the determinants of fragment level of land property rights in China's agriculture tenancy relationship in light of three dimensions: market, technology and institution. The transaction costs in tenancy relationships are brought by fragment of land property rights which are due to labor division in tenancy relationship, but these costs can be made up by the gains from labor division and specialization. Thus, the tradeoff between the two forces determines the level of fragment. In order to cope with transaction costs, on the one hand, the economic relationship's ability to support higher transaction costs by market size expansion or agrarian technology progress must be strengthened, and on the other hand, contractual arrangements should be used to reduce these costs directly. However, because transaction costs are always positive in real world and keep on increasing during the evolution of agricultural tenancy history due to the persistent fragment of land property rights, as shown in the paper, the agriculture cannot realize economic progress by reducing transaction costs through contractual (here i.e. institutional) adjustment but can by agrarian technology progress and market expansion which are helpful to afford the increasing transaction costs. The above arguments are mainly drawn from China's agricultural tenancy history and can, to a large extent, be deduced to analyze the sources of economic progress to tell that technology and market seem more fundamental than institution.

Keywords: Tenancy contract, transaction cost, market size, technology progress, land property rights, agricultural development

JEL Classification: N55, R52, O13