Three essays on contract farming in China

Jianhua Zhu

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: Contract farming in China has grown rapidly over the past 10 years. The first part of this dissertation examines the evolution of contract farming, and explores the incentives to engage in contract farming, preferred contract provisions, and contract performance from the perspective of both Chinese farmers and contracting firms. Firm and household perceptions of contracting are assessed using data obtained from village and firm level surveys. Farmers identify price stability and market access as the key advantages to contracts, while firms consider improved product quality as the primary incentive to use contracts.;In Part II, the survey data are used to empirically analyze the farm level income effect of a contract farming program in China. Two methods, propensity score matching and the econometric sample selection model, are used to estimate the treatment effect of a contract farming program. Four samples are obtained from the survey by restricting the analysis to farmer groups of varying levels of homogeneity. Results using the four samples of farmers and the two estimation methods vary in important ways. When the sample is the most homogeneous, both estimation methods indicate that the contract farming program does not substantially increase per laborer's gross income.;The third paper develops an applied contract model taking into account hidden information and other factors to show the pricing mechanism could result in the exclusion of small-scale farmers from the contract production program. The empirical results show that small-scale farmers are likely to be excluded out of the contract farming program in China. Further a linear pricing method employed by contracting firms is one of the primary factors contributing to the exclusion of small farms. The resulting policy implication is that the government should encourage contracting firms to employ a differentiating pricing strategy offering contracts with price and quantity provisions. Possible policy instruments include contract pricing regulations and the redesign of the government's grant distribution mechanisms.

Date: 2007-01-01
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