Optimal Behavior of Rice Farmers in the Imperfectly Competitive Land Lease Market in Japan: With a Focus on Transaction Costs andUncertain Returns on Land Lease Investment

Hitoshi Kusakari and Satoshi Nakagawa

Journal of Rural Economics, 2011, vol. 83, issue 01, 15

Abstract: In the process of drawing up contracts, farmers must pay some transaction costs, including the cost for searching for appropriate farmlands. In addition, farmers tend to postpone making the contracts from their anxiety about uncertain returns on land lease investment in spite of present profitability. The objective of this study is to judge whether transaction costs and uncertain returns work as restrictions on the number of land lease contracts in Japan. This study assumes that the previous papers associated with this context overestimated the number of the contracts because of ignoring the effects of the two obstacles resulting from their precondition of the competitive market framework. The originality of this study is to prove the previous overestimation from the theoretical and empirical viewpoints, and to estimate the transaction costs and the option value coefficients as an index of uncertain returns by applying real option theory. The main outcomes of this study are as follows. First, the study makes it clear theoretically that the perfectly competitive land lease market assumption adopted by the previous papers leads to the overvaluation of the number of land lease contracts when the market competitiveness is imperfect. Second, the study proved empirically that the land lease markets of rice farming are imperfectly competitive according to the significant estimation results of the transaction costs and the option value coefficients. Third, from the estimation results of the study, the estimate of transaction cost in the former period of 1981 to 1992 was relatively larger than the estimate in the latter period of 1995 to 2002; on the contrary, the estimate of option value coefficient in the former period was relatively smaller than the estimate in the latter period. These results imply that each of the two obstacles restricts the number of land lease contracts at different periods. The empirical results of this study strongly suggest that the government policy to mitigate both transaction costs and a degree of the uncertainty of returns on land lease investment is effective in accelerating farmland lease contracts in rice farming in Japan.

Keywords: Production; Economics (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aesjre:241960

DOI: 10.22004/ag.econ.241960

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