household responsibiliy system

8/6/2019 Household Responsibiliy System

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The Household Responsibility Systemin China's Agricultural Reform:A Theoretical and Empirical Study*

Justin Yifu LinDevelopment Institute, R esearch Center for Rural Development,the State Council, and Beijing UniversityThe emergence and eventual prevalence of the household responsibil-ity system, which replaces the production team system as the unit ofproduction and income distribution, has brought about dramaticchanges in China's rural areas since 1979. This institutional change hasresulted in remarkable growth in agricultural productivity.' However,in the literature on collective farms, a theory that is capable of ex-plaining the causes and effects of this change is yet to be developed.The formal theory about collective economies developed so far byWard, Domar, Sen, Oi and Clayton, Bradley, Maurice and Ferguson,Cameron, Bonin, Chinn, Israelsen, Putterman, and others suggeststhat the allocation of resources in a collective farm is efficient at least inthe long run.^ These authors also indicate that in a collective farm theincentive to work hard is likely to be greater than it is in a private farm.If the implication of the existing theory were correct, the recent institu-tional reform in China's rural areas would be incomprehensible.In their celebrated article, A. Alchian and H. Demsetz argue thatthe incentive to work in a team will be lowered if the metering of effortis not perfect.^ Because of agriculture's sequential nature and spatialdimensions, monitoring labor effort in agricultural production is ex-tremely difficult and very costly . Therefore, the optimal degree of mon-itoring, in general, is minimal in a production team. As a consequence,the incentive to work is low and undercontribution of effort is epidemic


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S200 Econom ic Developm ent and Cultural ChangeChina's rural areas, a model of a production team with a work pointsystem as its compensation scheme is constructed in Section II, whichfollows an overview of the recent reforms in China's agriculture pre-sented in Section I. The supervision and cost of supervision are for-mally incorporated in the m odel. The incentive to work in a productionteam is found to be a function of the degree of supervision exerted bythe team management. A s it is too costly to provide close supervisionin agricultural production, the incentive to work is thus low in a pro-duction team. The difficulty of metering effort is overcome in thehousehold responsibility system because each worker becomes theresidual claimant; therefore , no metering is required. Three hypothesesare drawn from the above theoretical model and tested with the empir-ical data before and after the institutional reform in China. The resultsare, in general, consistent with the implications of the model.I. Background an d OverviewAfter the collective movement in the 1950s, China's agriculture wasorganized under the production team system for about 20 years. In thissystem, workers were accredited with work points for the jobs thatthey performed every day. At the end of a year the net team income,after deductions for state taxes, public welfare fund, and so on, wasdistributed according to the work points that each one accumulatedduring the year. Various system s of work points had been used. In onesystem, a point price was set in advance for each task. T hus, fixedpoints were eamed when jobs were assigned to workers. In other sys-tems, each w orker had a record that w as kept simply by the num ber ofdays worked. At the end of the year, each worker first proposed hisown rating, and, after his peers' evaluation, each was awarded pointsranging from 6 to 10. The number of days worked w ere then multipliedby his grade. The result was his total work points. In still anothersystem, one member of the team was chosen to be the "pacesetter."The rest judged themselves in relation to his performance and assignedtheir work points accordingly.'*

In all these systems, work points were supposed to reflect thequality and quantity of work provided by each worker. However, dueto the nature of agricultural production, it is extremely difficult tosupervise agricultural work.^ A peasant, in general, received fixed


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Justin Yifu Linthe Chinese leaders recommended sweeping changes in rural policies Important, distinct elements of these changes include diversification ofthe mral economy, product specialization and crop selection in accor-dance with regional comparative advantages, expansion of free mar-kets, and a marked rise in government procurement prices. Howeverthe household responsibility system was originally considered the re-verse of the socialist principle of collective farming. It was actuallyprohibited in the document issued by the Fourth Plenary Session of theEleventh Central Committee of the CPC in September 1979. Theofficial position at that time maintained that the production team was toremain the basic unit of production, income distribution, and account-ing. Nevertheless, toward the end of 1978 a small number of produc-tion teams in Anhui province, located in areas that were frequentlyvictimized by flood and drought, first secretly and later with the bless-ing of local authorities began to try out the system of contracting land,other resources, and output quotas to individual households. A yearlater these teams brought in yields far larger than those of other teamsin the same areas.** Seeing this remarkable effect, the central au-thorities conceded the existence of the household responsibility systembut required that it be restricted to the poor agricultural regions, mainlyto the hilly, mountainous areas and poor teams where people had lostconfidence in the collective sys tem .' How ever, this restriction was noteffective, and rich regions w elcomed the household responsibility sys-tem as enthusiastically as poor regions. '' It thus spread rapidly to manyparts of China. Full official recognition of the household responsibilitysystem as universally acceptable was given in late 1981. By the end of1983, almost all the households in China's rural areas had switched tothe new system of fanning.''It is worth emphasizing that the household responsibility systemwas worked out among farmers, initially without the knowledge andapproval of the central govemment. It was generated through the ef-forts of peasants themselves and spread to the other areas because ofits merits; it was not imposed by the central authority, unlike manyother institutional changes that occurred in the last three decades. Inshort, the shift in the institution of Chinese agriculture was not carriedout by any individual's will but evolved spontaneously in response to


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S202 Economic Development and Cultural ChangA . Basic AssumptionsTo simplify the matter, a production team is assumed to have N individual households. Each household has only one worker. Everyworker has identical abilities but different preferences. The behavioassumption for the ith worker in a production team is

max.^C/,. = t / , ( / , , e , ) , (1where C/,, /;, e, are the ith worker's utility, income, and effort, respectively. Function U; is assum ed to be twice differentiable and concaveall its arguments; e, is the effort contributed by the rth worker to thproduction of the team . Each w orker allocates his effort in such a wayas to maximize his utility. In the production process, a laborer not onlyworks but also allocates re so urc es. ' ' Effort, thus, consists of the quality and the quantity of labor. The quantity of labor is the " b m te forceprovided by a worker and is substitutable by the other factors of production, such as machinery. The quality of labor is the allocative service offered by a worker, which affects the productivity of the othefactors. Effort is a variable ranging from zero to on e. "Z e ro " means noeffort is supplied. "One" means the maximum possible amount oeffort is contrib uted. Effort is assum ed to be hom ogenous. /, is theincome distributed from the production team according to the rth worker's work point share .s, and the net team income Y\ that is,

// = s.Y. (2The rth worker's work point share, J,, is a ratio between the workpoints accum ulated by the rth worker, /i,, and the total work points in team, H.

N

Work points represent a worker's effort contribution that is perceivedand credited by the team management. It is, therefore, a function ofeffort supply, ^,, and the degree of supervision in the team, ir:


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Justin Yifu Lindhig^ ^ 0 , equality holds when -n = 0;dhig^ ^ 0, equality holds when ej = 1; (5

d%' > 0.

From the above definitions, we see that when no supervision is ex-er ted, IT = 0, then 5, = 1/iV for all i. Each w ork er will have an equalshare of the net team income, no matter how hard he actually worksConversely, when supervision is perfect, IT = 1, s,- = e/E, where E isthe total effort contributed by all team members, that is, E = 1%-^ e,.Each worker's work point share is exactly equal to his share of effortsupply in the total effort contribution. Only in this situation is thedistribution of incom e in a production team tm ly "t o each according tohi s work . "Also for reasons of simplicity, a single crop is assumed to becollectively produced on the land owned by the team. Land and otherresources are assumed given to the team. The only variable in produc-tion is the total labor effort that is contributed by the team members.So

X = F(E), with FE>0 and FEE < 0, (6)where X is output and is the total effort offered by the A^ individuaworkers ; F is the p rod uc tion function that is well defined with con tinu-ous first and second derivatives with respect to its argument; FE andFEE are the first and second derivatives, respectively; and is a well-defined function of the degree of supervision:

E = E{-n), with EE>0 and EEE < 0. (7Th at is , an inc rease in the degree of supervision induces an increase inthe effort supply of the team as a w ho le; how ever, the rate of increaseof effort supply is reduced when the degree of supervision increases


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S204 Economic Development and Cultural Changthe production process that affect the supervisibility of labor effort. Anincreased value of F implies that the difficulty of supervising laboreffort is aggravated.

The team management is assumed to have perfect knowledge othe supervision cost function, C(TT; N, F); the production functionF(E); and the effort supply function, E(-n). The objective of the teammanagement is to choose a TT so as to maximize the average net incomper worker.'^ Therefore, the objective function is

max, -1 {F((T7)) - C(TT; N, F)]. (9

B. The Incentive Structure in a TeamAs each individual worker chooses his effort to maximize his ownutility, the behavior mles of an individual worker can be derived fromhis objective function, equation (1). Assuming that the degree of supervision, cost of supervision, as well as all the other workers' efforsupplies are given, the first-order condition for utility maximization is

for/ = 1, . . . , N. (10de,

U'l and Ue are the rth worker's marginal utility of income and margindisutility of work, respectively; - t/ can be interpreted as the marginautility of leisure. Therefore, - Ue/U}. is the marginal rate of substitution between income and leisure for the rth worker. It is also the oppor-tunity cost of working.

The left-hand side of equation (10), dljldei, represents the marginaincome for an additional unit of effort contribution. This is generallyperceived as the incentive to work. The incentive to work can in tumbe decomposed into

^^ (11where Ai = (E/H) {dhjded- Equation (11) says that the incentive towork for the rth worker in a production team is a weighted averagebetween the marginal product of effort for the team. YE, and the ad


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Justin Yifu Lin S20

F I G . !.Determination of individual effort supplyEquation (10) stipulates that, in order to maximize his utility, aw ork er in a pro du ction team will allocate his effort in such a way as to

equate his marginal income of effort with his marginal rate of substitu-tion between leisure and income. The individual's choice is illustratedin figure 1.The basic principle of allocating effort for a worker in a productionteam is identical to the principle for any other rational person in anyoth er form of institution . They all will equalize their marginal retum s ofeffort to their marginal rates of substitution between leisure and in-come. Nonetheless, the marginal rates of retum to effort are different

in different ins titutio ns . F o r a hired w orker in a private farm, it is Y E . Incontrast, it is (1 - si) Ai (Y/E ) + S/YE in a production team with a


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S206 Economic Development and Cultural Changhigh and there will be an overcontribu tion of effort in the normal regionof production where the average product of effort is greater than themarginal product of effort.'^ To the contrary, in some literature basedon empirical observations, the incentive is necessarily lower in a collective economy because supervision is assumed to be zero. In thicase, a worker only gets \/N of the marginal product of his effort, sothere will be an undercontribution of labor. "It is important to m ake a distinction here between the problems oincentive in different institutions. In a private econom y, a hired workeis offered a wage up to his marginal product. YE- If the supervision inot perfect, he may shirk, so he supplies less effort than what his wagis worth. This is the moral hazard problem, which is extensivelystudied by labor economists.'* The problem in a production team oother collective organization is different. A worker supplies less thanan optimal amount of effort not because he shirks but because thmarginal retu m to his effort, S/,/ae,, is less than the marginal product ohis effort. YE- Because the nature of these problems is different, thfunctions of supervision are also different. In a private organizationsupervision is necessary for the purpose of guaranteeing that a workewill offer his effort up to the point at which he is paid . In a productionteam, supervision is important because the marginal retum of effort toeach worker is a function of it. Theoretically, the incentive scheme in production team is not necessarily inefficient. It all depends on thedegree of supervision. Thus, how the degree of supervision is determined is the key to understanding the incentive problem in a production team.

C. The Optimum Degree of Supervision in a TeamThe determination of the degree of supervision is modeled by permitting the team management to decide how much supervision is optimumfor maximizing the average net income per worker, with team mem bermaking marginal adjustments in their decisions on how much effort tocontribute. The relations between the team management and the workers are supposed to be of the Stackelberg type. The team managementakes the reaction functions of the individual workers as given, whileindividual workers take the actions of the team management as given


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Justin Yifu Lin 02

for/ = 1, 2,Then for a given IT , assuming the Nash equilibrium is unique, el = e^for all (. Thus the effort supply function for the team as a whole is

NE = ( I T ) = 2_, ei{-n). (1

For the team as a whole, an increase in the degree of supervision expected to have a positive effect on the total effort supply of the teamin the economically relevant region. This is because as the degree osupervision increases, the incentive for the team as a whole is alsincreasing in the economically relevant region,'* and, simultaneouslythe cost of supervision increases as well. The incentive, being thmarginal income of effort, can be treated as the shadow price of lesure. When the price of leisure increases, there will be a positive substitution effect on the effort supply. Meanwhile, the simultaneous increase in the cost of supervision reduces the net income of the teamtherefore, the income effect on the effort supply for the team as whole is also positive. Because both the substitution effect and thincome effect are positive in the relevant region, the effort supply fothe team as a whole increases as a result of an increase in the degree osupervision.

The first-order condition for the maximization of the team objective functions, equation (9), is

FEE.^ - C , = 0. (14According to equation (14), in selecting a degree of supervision to exeron team members, the management needs to balance the positive indirect effect of an increase in output induced by an increase in efforsupply against the direct effect of an increase in supervision cost. Thoptimum choice of the degree of supervision is reached when these twoeffects offset each other.

In the discussion thus far, the ability to supervise labor effort inthe production process is held constant. Although it is exogenous t


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S208 Economic Development and Cultural ChangThe denom inator of equation (15) is just the second-order condition omanagement's maximization problem. It is negative by the assumptions of F , , and C. The num erator is positive because as the difficultof supervision, F, increases, it becomes harder to supervise labor effort. Thus, the marginal cost of an additional degree of supervisionincreases as a result. The sign of equation (15) is therefore negativeThis implies that if we compare two production teams, identical ievery aspect except the ability to supervise, the team with better ability to supervise will choose a higher degree of supervision than thother team.

The ability to supervise is only one of many factors that affecincentive in a team. Other factors, such as the proportion betweendistribution according to need and distribution according to work, relative price of team output, fixed charges on the team, and so on, alsoaffect an individual's incentive to work . How ever, ability to supervisis the most important factor in explaining the failure of the work poinsystem in Chinese agricultural production teams and in explaining thdominance of the household responsibility system over the productionteam system.

Because of the insurmountable difficulties in supervising agricultural work, in the work point system, in most cases, every workereceives the same am ount of work points for a given job no m atter howhard he actually works. This amounts to nonexistence of supervisionTherefore, the marginal retum of effort for a worker is only l/N of themarginal retum of effort to the team as a whole.In the household responsibility system the difficulties of supervision are totally surmounted. By definition, supervision in a householdsystem is perfect b ecause a w orker know s exactly how m uch he worksand the cost of supervision is zero because no resources are requiredfor carrying out the m etering. A worker in the household responsibilitysystem, consequently, has the highest incentive to work not only because he can get a full share of the marginal rate of retum to his efforbut also because he can save the cost of supervision.^^m . Hypotheses and TestsA, HypothesesThe theoretical model of Section II provides us with several testable


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Justin Yifu Lin ^2team , it is obvious that the wider the spread of a production activity ithe less intensive is supervision. Likewise, as the period of productiotakes longer, the outputs are subject to more random impacts fromoutside forces, and thus outputs wiU carry less information about eacworker's effort. Therefore, the longer the period of production, thcloser supervision must be for a certain degree of accuracy in meterineffort.

From the above discussion, it can be seen that, with the samwork point system , the incentive to work will be higher in industry thain agriculture because, in general, both the spatial dispersion and thperiod of production are , respectively, smaller and shorter in industryFurthermore, in the same agricultural production process, the incentive in a system with the household as a unit of production will also, igeneral, be higher than the incentive in a production team. This ibecause the worker becomes the sole member of the team in a household system . By definition, the supervision is perfect, and he gets a fushare of the marginal product of his effort. In contrast, the supervisioin an agricultural production team is almost zero, and, thus, the marginal retu m to a worker 's effort is only a small fraction of the marginaproduct of effort of the team as a whole. Therefore, even though theconomies of scale are sacrificed in the household system, it can bshown, assuming that supervision does not exist in the productioteam system , that the incentive stmcture in the household system dominates that of the production team system as long as the coefficient oretums to scale is less than two. The proof of the above statement igiven in the Appendix.

In China, farming has been the most important production activity; nevertheless, peasants have also made their living from householsideline production. In 1979, the year the household responsibility system began to emerge, 27.5% of the per capita net income of peasantcame from household sideline production.^' Household sideline production was not collectivized before the household responsibility system appeared. Therefore, recent reform in China, resembling a controlled experiment, provides an excellent opportunity for testing thvalidity of several implications of the theoretical model posttilated inthe last section. Several hypotheses are in order:


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S210 Economic Development and Cultural Channegotiations, redefinition of each person's rights and obligations, anso forth, a re required to accomplish such a change. Hence, the largthe gains or the less the costs, the faster the change progresses.

Hypothesis 2. The effect of the institutional change in agriculturproduction from the production team system to the household responsbility system mainly involves the augmentation of effort supply, both terms of quantity of work and quality of work.

In a production team, workers will also equalize their shadoprice of leisure with the marginal retum to their efforts. Since thmarginal retum was only a small fraction of the return to productiothe worker's supply of effort was thus suboptimum. Consequentlwhen the m ai^inal retu m of effort increases in the household responsbility system, the effort supply of each worker increases in responsThe institutional change, therefore, results in an increase in the suplies of the quantity of work and the quality of work by each worke

Hypothesis 3. The change from the production team system to thousehold responsibility system should have a positive effect on agricutural production. Yet, its effect on household sideline production is indterminate.^^

As argued above, the supervision cost in agricultural productiowas very high under the team system, so the extent of supervision wavery low in the production team . This translates into the following: thmarginal retum to effort in agricultural production for a worker waonly a small fraction of the m arginal re tum to production as a whole. Ithe household responsibility system, the marginal retum to effort restored to a full share. As a rational worker allocates his effort tequalize the marginal retum across different jobs in order to maximizhis income, he will allocate more effort to agricultural production aftthe change in the institution. Consequently, an area with a higher ratof progress in adopting the household responsibility system is expecteto have a higher rate of growth in agricultural production. Howevethe effect of this progress on household sideline production is indeteminate. If the effort supplied by each w orker is con stant, a higher rain the progress of the household responsibility system is expected t


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Justin Yifu Linthe freedom to arrange their own time. This freedom in schedulingon e's activities am ounts to an increase in total available effort. There-fore, the impact on sideline production of the progress in the householdresponsibility system depends on the relative magnitude of the real-locative effect and the scale effect. It can be positive, negative, or zero.B. DataTesting hypotheses 1-3 employs observations from 29 provinces. Mostdata about these 29 provinces are taken from the China AgricultureYearbook, dating from 1979 to 1983 and published by the AgriculturalPublishing House in Beijing. Most data from these years can also befound in the Statistical Yearbook of China, except for that of 1979 and1980 because the first Statistical Yearbook began in 19BI. Data pertain-ing to the progress in the household responsibility system in each prov-ince are provided by the National Research Center for Rural Develop-ment at Beijing. They indicate the progress in each province by the endof 1982. Fifty percent progress means that 50% of the production teamsin that province had converted to the household responsibility systemby December 1982.All data used in this study are official data . The quality of Chineseofficial data is doubted by many scholars in the West because thestatistics were used as "a weapon of class stmggle" in China beforethe end of the Cultural Revolution and also because China did not havea sound system of statistical collection. This doubt is not without sub-stance. A footnote under the cultivated land section in The Almanac ofChina's Economy 1981 reads, "Thefigureof cultivated land is underes-timated and remains to be verified."^' Cadres at the local level mayunderreport certa in figures to evade taxes, as in the case of cultivatedland, or overreport certainfigures o gain political favors, as in the caseof tractor-plowed areas (because this is one of the indexes of modem-ization in Chinese agriculture). However, in recent years the consen-sus among those in academic circles involved with Chinese studiesseems to be that the Chinese official data are, after all, the best avail-able data. In his introduction to a book that contains examinations ofthe quality of Chinese statistics by several authorities on the Chineseeconom y, Robert F . Dernberger sums up their jointfindingsby sayingthat " the available official date [in China] do reflect the basic trends of


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S2I2 Economic Development and Cultural Chacosts of such a change. The average size of production teams and ratio of the gross output value of crop cultivation to the gross valueanimal husbandry in each of the provinces are used as proxies for tgains of this iastitutional change. For the costs, the proxies are average number of machines and draft animals per team in each proince.The theory discussed in the last section indicates that the modifficult it is to monitor labor input in the original production team , larger will be the improvement in incentives and, therefore, the gafrom shifting to the household responsibility system. Other things bing equ al, the larger the size of mem bership in a team , the harder it ismonitor. H ence , the size of a team is expected to have a positive effon the diffusion of the household responsibility system . The ratio of gross value of crop cultivation to the gross value of husbandry is aexpected to have a positive effect on the diffusion. Because retumsscale are limited and monitoring is extremely difficult, most animhusbandry was carried out by individual households even before thousehold responsibility system. For example, a major component husbandry in China is pig raising; the value of pork alone consisted53% of the gross output value of husbandry in 1983.'^* For the mpart, hogs have always been raised privately. Therefore, the moimportant crop cultivation was, compared to husbandry, the more vere were the labor management problems. Thus the gains of adoptithe household responsibility system were larger.

The average number of machines and of draft animals used pteam are proxies for the degree of difficulty in breaking down a prodution team. Among all the agricultural inputs, machinery is least divible. Therefore, if a production team heavily relied on machinery for production, it would be difficult to break down the production inhousehold-based operations. The effect of the average number of mchines per team on the diffusion of the household responsibility systeshould be negative. However, the average num ber of draft animals pteam should have a positive effect on the diffusion. In general, dranimals are suitable for household-based operations.To be prec ise, the empirical equation that I would like to estima

is


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Justin Yifu Linoutput value of crop cultivation and that of husbandry in each prov-ince; MACH is the average total horsepower per team of equipmentused in farming, forestry, husbandry, fisheries, and household handi-craft p roduction. But machinery used in village-run industry, constm c-tion, and nonagriculturai transportation is excluded. DRAFT is theaverage number of draft animals per team; ^ is the stochastic residualcomponent that consists of elements that are related to the diffusion ofthe household responsibility system in an area but that are unobserv-able to the econometrician. One of such unobservable factors is thepotential of retum s to scale in the production process of an area. If thepotential retums to scale are large, the sacrifice in changing from theteam system to the household responsibility system is also large; there-fore, the adoption of the household responsibility system should beslower in that area.The size of a team, the numbers of machines and of draft animalsin a team are themselves choice variables. The decisions about the sizeof a team and the proportion of machinery to draft animals in a teamshould be responsive to the potential of retums to scale in the produc-tion process. They are thus not uncorrelated with the residual term.Therefore, ordinary least squares regression methods will not yieldconsistent estimates of the parameters of the diffusion functions. Con-sistent estimates can be obtained by first estimating N, MACH, andDRAFT with variables tha t are correlated with these regressors but areuncorrelated with the residual com ponent, then by using the fittedvalues otN, MACH, and DRAFT, together with RATCH, in estimat-ing the diffusion function. The instrumental variables that are used inthe two-stage least squares regressions to estimate the endogenousregressors include cultivated land per worker, the ratio of irrigated landto total cultivated land, a multiple cropping index, the ratio of urbanpopulation to mral population, and population density. The results ofthe two-stage least squares estimates are as follows:

RT = -.99 -t- .UN + .lORATCH - .47MACH -I- .09DRAFT(.71) (1.78)** (3.23)*** (5.13)*** (2.54)***

R^ = .62, F = 12.2. (17)


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S214 Econom ic Developm ent and Cultural Changemore important the crop cultivation is compared to the animal husbandry in an area, the harder is the monitoring, and thus the greater thegains are from shifting to the household responsibility system. Thesefindings also confirm the hypothesis that the easier it was to dismantlproduction team s, the faster it was to adopt the household responsibility system in that area.Hypothesis 2. This hypothesis holds that the effect that thechange from the production team system to the household responsibility system has on production comes from an increase in effort supplyincluding the quantity of work and the quality of work.^* Since whacan be observed from the data is the number of work ers, not the hoursthat each worker w orks or the quality of work that each worker offersthis hypothesis cannot be tested d irectly. How ever, due to the restrictions on m igration within China, the number of farm workers in an areawill not decrease dramatically in a short period. If the effective supplyof effort increases substantially after changing to the household re-sponsibility system, as the hypothesis sta tes, the shadow price of effective labor per day should have decreased. The quantity of work sup-plied by a worker is substitutable with the other factors of productionTherefore, the demand for labor substitution factors should havedropped. A tractor is a labor substitution factor in fanning, thus thedemand for tractors is expected to have decreased . However, the number of tracto rs has not reduced but has instead risen rapidly since 1979In China, the number of large- and medium-sized tractors increasedfrom 666,823 in 1979 to 840,776 in 1983. Furthermore, the number ofsmall-sized and walking tractors increased even faster, from 1,671,O(X)to 2,750,000, during the same period.'^'' Yet, as noted by Johnson, mostof the tractors are used primarily for transportation and not for farmwork.^^ The best index of trac tor usage in farming is the tractor-plowedarea. Although the number of tractors was not reduced, the usage oftracto rs in farming did decrease greatly. Table 1 shows that tractor-plowed areas reached a peak in 1979, began to decline in 1980, and didnot pick up again until 1984. It is the first time such a downturn hashappened since tractors were introduced into China. These changesoccurred simultaneously with the introduction and the completion ofthe household responsibility system in China. Thus the data supporthe labor augmentation hypothesis.^*


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stin Yifu Lin S215TABLE 1

TRACTOR- PLOWED A REA AND CHEMI CAL FER TI LIZER CONSUMPTION IN C H I N A , 1952-84Tractor-plowed Area

(in 10,000 ha)13.6263.6828.4

1,557.94,067.04,241.94,099.03,647.73.511.53,357.23,492.2

Consumption of Chemical Fertilizer(in 10,000 T o n s ) '7.837.363.0194.2884.0

1,086.31,269.41,334.91,513.41,659.81,739.8

SOURCES.Edi t o r i a l Board of China Agriculture Yearbook, China Agriculture Yearbook 198SAgricultural Publishing House, 1985). p. 89,

* 1965 figures and those prior to 1965 refer to the sales of chemical fertilizers; those since 1978to the consumption. Al! are calculated on the basis of 100% effectiveness.

creases, to mitigate the decline in the shadow price of effective

om other land-augmenting factors, such as chemical fertilizers.th the progress in the household responsibility system. The figures inilizer increased 53% between 1979 and 1983. "

The general facts support the hypothesis that the institutional

s 1) to estimate the relations between the progress in the


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S216 Economic Development and Cultural ChangThe structure equations for estimating the increase in the chemicalfertilizer consumptions are as follows:

IF = Co + c,RT -I- C2F8O + u, (20)and

RT = flo + axN -I- fljRATCH + ajMACH 4- a4DRAFT + |x.(21)

The definitions of RT, N, RATCH, MACH, DRAFT, a,, and JJL arethe same as those defined above in the testing of hypothesis 1. Thevariable DT is the decrease in the ratio of tractor-plowed area to thetotal sown area in each province between 1980 and 1982; TP80 isthe ratio of tractor-plowed area to the total sown in 1980; IF isthe increase in the amount of chemical fertilizer consumption per acreof sown area between 1980 and 1982; F80 is the amount of chemicalfertilizer consumption per acre of sown area in 1980; b^ and co areconstant terms; bi, b2, c, , and C2 are coefficients; T and o- are stochastresiduals in their respective equations; TP80 and F80 are themselvesendogenous variables that reflect each region's choice of productiontechnology in response to its resource endowments.^' Therefore, theendogenous variables consist of DT, TP80, IF, F80, RT, A^, MACH,and DRAFT. The instrumental variables that are used in the first-stageregressions are the same as those used in the testing of hypothesis 1 . ^The results of these estimates are as follows:

DT = .11 - .15RT - .14TP80(2.27) (3.35)*** (L 99)**R^ = .35 , F = 8.50; (22)

IF = - . 7 5 -H 2.77RT - .06F80(.82) (3.19)*** (.85)

R^ = .05 , f = 1.71. (23)


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Yifu Lin S2171% level of confidence. None ofsts above is a direct test. How ever, when the results of these two

t in agricultural production the effect of changing from a production

Hypothesis 3. This hypothesis states that workers will allocatety system . Consequently, an area with faster progress

ity system is expected to have a higher rate of growth in agriculture.on the growth ra te of household sideline production is indeter-

crease in the effort supply induced by high incentive in the house-e's time will have a positive effect on household sideline production.The growth ra te in one sector may be affected by the growth rate

ity system, the variations in growth rate among regions might also beportunities that were created by those new policies. In addition,

GO Al = (3o + fliRT ^' ajGO Sl + afiOAO + a4LAN -H CT;(24)GOS l = feo + ZJ,RT + /jiGOAl + ^jGOSO + i>4RATUR + T;(25)RT = Co + CiN + CjRATCH + cjMACH + C4DRAFT + ^^..

(26)


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S218 Economic Development and Cultural ChangThe term RATUR is the ratio of urban population to rural population i1982; LAN and RATUR are included to capture each region's ability ttake advantage of opportunities arising from new rural policies othethan the household responsibihty system; a and T are the stochastresidual terms; RT, N, RATCH, MACH, DRAFT, and n are the samas defined in the testing of hypothesis 1.

Two-stage least squares regressions are employed to estimate thstmcture equations. GOAl, GOSl, RT, N, MACH, and DRAFT artreated as endogenous variables. In addition to those variables that arused to estimate N, MACH, and DRAFT in hypothesis 1, the predetermined variables also include GOAO and GOSO. The results of the estmates are as follows:

GOAl = - .03 -h .26RT - .007GOS1 - 1.12GOA0 + .002LAN(.38) (3.11)*** (2.28)** (8.32)*** (.871)

R^ = .73, F = 19.5; (27GOSl = - 8.44 + 10.69RT - 3.9IGOA!

(1.82)* (2.17)** (.76)- 13.96GOS0 + 10.80RATUR

(4.61)*** (4.14)***R^ ^ .67, F = 15.2. (28

Figures in parentheses are the absolute values off-statistics; *, **, an*** indicate that the estimated value is significantly different from zerin a one-tailed test at the 10%, 5%, and 1% level of confidence, respectively. The estimates of the RT equations are not presented.

As hypothesized, the coefficients of RT are positive with respecto GOAl. The estimate of the coefficient reaches significance at the 1%level of confidence. Thus the evidence supports the hypothesis that thinstitutional change had a positive effect on agricultural productionAreas that shifted at a faster pace to the new household responsibilitysystem had higher rates of growth in agriculture than those that shifted


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Yifu Lin 21

effort supply that was induced by the household responsibility sys

Both GOAO and GOSO have strong significant effects. This migho the fact that the rural reforms, like opening rural markets andof 1978 or the beginning of 1979. These reforms may move agriculand household sideline production to a higher path of growth in the

of growth in the early period had lower rates of growth in the laterIn the regression function of GOAl, RT has the second highest t-only next to that of GOAO. In contrast, in the regression function

RT. These facts imply that the differences in the rate

ulation could take advantage of these new opportunities bet-


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S220 Economic Development and Cultural Chantural work. In contrast, the prevalence of the household responsibilisystem over all other variants of responsibUity systems occurs becauthe supervision problem is solved from its root in the household rsponsibility system. It is, therefore, important to have an institutiocompatible with the nature of the production process for improviefficiency in a socialist economy. And, finally, I conclude that the logof rational behavior in modem economics is applicable to understaning behavior in a socialist economy.

AppendixA Mathematical NoteIn this appendix 1 attempt to prove that, if supervision does not exist in thproduction team system, the incentive structure in the household responsibilisystem will dominate the incentive structure of the production team system.shall not attempt to deal with the general problem. Instead, I shall assume theach worker is bestowed with the same amount of endowment (say land, t)addition to his or her effort, e. The production function is assumed to be of thgeneral Cobb-Douglas type. In the household responsibility system, incomefor a worker is

When there is no supervision, the income for the ith worker in a team with Nworkers is/, = i/Af F- (Ntf, E = ei + . . . +^Ar.

Proposition. When supervision does not exist, the incentive structure ithe team system isdominated by tha t in the household responsibility system along as the coefficient of returns to scale is less than two.Proof. The incentive to work in the household responsibility system idylde = ae"- '?*. (A

The incentive to work in the team system, in Nash equilibrium, is


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Justin Yifu Lin S2Notes* This paper is based on my dissertation at the University of Chicago.would like to thank D. Gale Johnson, Theodore W. Schultz, and SherwRosen, my advisers, for their guidance and inspiration. The Prince CharitabTrusts ' generous support for my graduate program is gratefully acknowledgeAn earlier version of this paper was presented at seminars at the University Chicago, the Chinese University of Hong Kong, the W orld Bank, Tokyo Meropolitan University, Aoyama-Gakuin University, the Institute of DevelopinEconom ies at Tokyo, the National Research Institute of Agricultural Economics of Japan, the Tokyo Center for Economic Research, and the InternationFood Policy Research Institute. I am indebted to the participants in thosseminars for their itisightful comments. I am especially grateful to Hans PBinswanger, Evsey Domar, Alan Gelb, Thomas R. Gottschang, Yujiro Hayami, Shigem Ishikawa, Yue-Shen Kwoh, Edward Lazear, Keijiro Olsuka, SaPeltzman, Dwight Perkins, Louis Putterman, Vemon W. Ruttan, T. PauSchultz, Terry Sicular, George ToUey, Tang Tsou, Yue-Chim Wang, Lung-FWong, and many of my classm ates for helpful suggestions. I am also grateful the Research Center for Rural I>evelopment, the State Council of the PeopleRepublic of China, for making the empirical research possible.

1. It is estimated that the shift from the production team system to thhousehold responsibility system, on the average, increases the productivity oa farm by 20%. See Justin Yifu Lin, "Household Farm, Cooperative Farm, anEfficiency: Evidence from Rural De-collectivization in Ch ina," Working Papeno. 533 (New Haven, Conn.: Yale University, Economic Growth Cente1987).2. Benjamin Ward, "The Firm in IUyria: Market Syndicalism," AmericaEconom ic Review 48 (September 1958): 566-89; Evsey D. Domar, "The SoviCollective Farm as a Producer Coo perative," American Economic Review 5(September 1966): 734-57; Amartya K. Sen, "L abor Allocation in a Coopertive Enterprise," Review of Economic Studies 33 (October 1966): 361-71Walter Y . Oi and Elizabeth M. Clayton, "A Peasant View of a Soviet Colletive Farm," American Econom ic Review 58 (March 1968): 37-59; Michael BBradley, "Incentives and Labour Supply on Soviet Collective Farms," Candian Journal of Econom ics 4 (August 1971): 342-52; Charles S. Maurice and CE. Ferguson, "Factor Usage by a Labour-managed Firm in a Socialist Economy," Economica 39 (February 1972): 18-31; Norman E. Cameron, "Incentives and Labor Supply in Cooperative Enterprises," Canadian Journal conomics 6 (February 1973): 16-23; John P. Bonin, "Work Incentives anUncertainty on a Collective Farm," Journal of Comparative EconomicsMarch 1977): 77 -97 ; Dennis L. Chinn, "Team Cohesion and Collective-Labo


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S222 Econom ic Development and Cultural Changecause of agriculture's sequential nature and spatial dimensions. In agriculturalproduction, the process typically spans several months over several acres ofland. Farming also requires workers to shift from one kind of job to anotherthroughout the production season . In general, the quality of work provided byworkers does not becom e apparent until harvesttime. Furthermore, it is impos-sible to determine each individual's contribution by simply observing the out-puts because of the random impact of nature on the production process. Toensure adequate work performance, it is necessary to provide close supervi-sion at each stage of production. See Michael E. Bradley and M. GardnerClark, "Supervision and Efficiency in Socialized Agriculture," Soviet Studies23 (January 1972): 465-73 .6. The session adopted the "Decisions of the Central Committee of theCommunist Party of China on Some Q uestions Conceming the Acceleration ofAgricultural Development (Draft)." The draft was promulgated 9 months laterby the Fourth Plenary Session of the CPC Centreil Committee in September1979. For the text of the decision, see Editorial Board of China AgricultureYearbook, China Agriculture Yearbook 1980 (Beijing: Agricultural PublishinHouse, 1980), pp. 56-62.7. Ibid., p . 58.8. Chuxian County in Chuxian Prefecture, Anhui Province, reported a12.5% increase in grain output, whereas production teams in Chuxian Countythat used the household responsibQity system increased grain output by 35.7%.Similarly, the ratio of increase in grain output was 12.4% against 35.7% tnQuanjiao County, 0.7% against 37.1% in Laian County, and 0.3% against31.0% in Jiashan County, all in Chuxian Prefecture. See Yizi Chen, "TheDawn for the Rural Area, the Hope for China: Report of a Survey on theImplementing of 'Baochan Daobu' in the Rural Area in Anhui Province," inRural Area, Economics and Society (Beijing: Institution of Rural DevelopmentProblems in China, 1981), p. 100.9. Economic Research Center, State Council of the People's Republic ofChina, Almanac of China's Economy 1981 (Beijing: Economic Journal Press1982), p. iii-4.

10. Yizi Chen, "Why Rich Communes Also Adopt the Household Re-sponsibility System," in Rural Area, Economics and Society.11. Only 1.02% of all production teams in China changed to the householdresponsibility system in January 1980. It was 14.4% by December 1980, 28.2%by July 1981, and 45.1% by October 1981. See Jingjixue zhoubao (Economicweekly, a weekly Chinese periodical published in Beijing) (January 11, 1982),By the end of 1983, about 97.7% of production teams, or 94.2% of householdsin China, operated under the household responsibility system. See S tate S tatis-tical Bureau, People's Republic of China, Statistical Yearbook of China 198(Beijing: Chinese Statistical Press, 1984), p. 131.12. This section draws on Justin Yifu Lin, "Supervision, Incentives, and


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tin Yifu Lin S22yield a structure that is identical for analytical purposes, but at th

16. See Sen; Israelsen; and Putterman; among others (n. 2 above).17. Dwight Perkins and Shahid Yusuf, Rural Development in China (B18. Stephen Ross, "The Economic Theory of Agency: The Principal'American Economic Review (May 1973): 134-39; Joseph E. Stig

Bell Journal of Economics 6 (Autumn 1975): 552-79; James Mirrleeshe Optimal S tructure of Incentives and Authority within an Organization,7 (Spring 1976): )05-31; and Bengt HolmstromBell Journal of Economics 10 (Sprin979): 74-91.19. For the team as a whole, the effect of an increase in the degree oon the incentive is easily seen from the reaction of the represental/N by definition. So

From this equation, we can see that a positive effect on the incentive foby an increase in the cost of supervision. Nevertheless, in th

ve of the team management is to maximize the net team output, if theeffect on incentive is negative, then the cost of supervision can be reduced

20 . This claim implicitly assumes that the retum to scale of the production21. State Statistical Bureau, Statistical Yearbook of China 1981 (Beiji22. Household sideline production includes household handicraft produc

23. Economic R esearch Center (n. 9 above), p. v i-3 .24. Robert F. Dernberger, introduction to Quantitative Measures o


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S224 Economic Development and Cultural Changwere ordered to expand the tractor-plowed a rea, and, when they no longer hadthe power in the new system, the tractor-plowed area declined. The first hypothesis is plausible, as cultivated land is fragmented after the household responsibility system reform. The second hypo thesis is less likely; because of theprevalence of multiple cropping, the shortage of labor seemed to be genuine inthe harvest and planting seasons before the introducing of the household responsibility system. Students, factory workers, and govemment employeewere mobilized to help peasants in the peak seasons. This practice doenot exist any more. Studies at the commune level by Chinese economists alsoconfirm the points that the main reason for mechanization in the past wato alleviate the seasonal labor shortage and that a surplus labor force is aphenomenon that did not happen until the introduction of the household responsibility system. See, e.g., Yifeng Zhao, "What Does the Relative Surplusof Farm Machinery in Liuji Commune Suggest?" Nongye jingji wenti (Problems in agricultural economics) no. 8 (1983), pp. 55-57. Note also that theincrease in the quality of work supplied by a worker will, in general, increasethe efficient service flow of a tractor. Therefore, the correlation between theprogress in the household responsibility system with the decline in the tractorplowed area reinforces my confidence in the hypothesis that the quantity ofwork supplied by workers increased.30. The price index of the purchased inputs for agricultural productionincreased 8.3% between 1978 and 1983. However, the price of chemical fertilizer increased 12.1% for the same period. Hence, the sharp rise in the consumption of fertilizer is not caused by a decline in relative prices.31. The induced technological innovation hypothesis & la Ruttan and H aami proposes that different regions will choose different technologies in response to their original resource endowments. For further discussions, seeYujiro Hayami and Vemon W. Ruttan, AgriculturalDevelopment: An International Perspective, rev. ed. (Baltimore: Johns Hopkins University Press1985), chap . 4 .32. Theoretically, TP80 should be correlated with the cultivated land perworker and multiple cropping index in 1980, and F80 should be correlated withthe ratio of irrigated land to total cultivated land as well as the ratio of urbanpopulation to rural population in 1980. However, these instrumental variablesare highly correlated with the cultivated land per worker, multiple croppingindex, the ratio of irrigated land to total cultivated land, and the ratio of urbanpopulation to rural population in 1982; therefore, the data from 1982 were usedinstead of data from 1980.33. These productions are not included because their institutions, in gen-eral, are not affected by the household responsibility system. For exampleanimal husbandry was mostly engaged in by individual households even beforethe new system was adopted and while the village-run industry was stiUmanaged by the collective system.


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household responsibiliy system

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