Unobservable land value in rural China and its microeconomic implication on land lease behavior

Purpose - Total farmland value exceeds its value in agriculture but is not directly perceptible to villagers in China. Thus, the exceeded part is often neglected when discussing farmer’s land transaction decision. This study aims to revisit the question about how land titling project affects farmer’s land renting-out and investigate how this unobservable land value would distort the intentional effects of land titling. Design/methodology/approach - This paper first modifies a two-period model by incorporating the unobservable part of land value into the farmers’ leasing decision problem. Following the implications from the theoretical analysis, this study then exploits the difference-in-differences and the triple-differences approach to confirm the distorting effects that are resulted from the unobservable land value. Findings - The modified theoretical model of this study reveals that land titling would encourage farmers to rent out land when the unobservable land value is predicted to be low but discourage farmers’ willingness to rent-out when this value is predicted to be high. The core reason for this significant conclusion lands in the uncertainty of the unobservable land value. Empirical analysis then provided two evidences for this presumption. Furthermore, this study also gave a disproof of the argument that the uncovered discouraging effect is due to a stronger endowment effect. Originality/value - This paper contributes to the literature by highlighting the unobservable land value in the farmers’ land-related decisions. This part of land value is always neglected in previous discussions about the land tenure system, but it would cause distorting effects especially in regions without private land ownership.