Grain into Gold? The Impact of Agricultural Income Shocks on Rural Chinese Households

No 2016-13, Department of Economics Working Papers from Department of Economics, Williams College

Abstract: This paper analyzes whether there is evidence of a poverty trap driven by credit constraints and non-linearities in the return to capital in rural China in the 1990s, estimating the effect of positive income shocks experienced by rural households as a result of increases in the price paid for mandatory grain quota sales. Households were required to sell part of their grain output to the state at a below-market price, and increases in the quota price generated income shocks that also varied cross-sectionally in accordance with crop composition. The identification strategy exploits climatically driven variation in crop composition in conjunction with quota price fluctuations to identify quasi-random variation in the size of the positive income shock and estimate its impact on economic outcomes. The results suggest agricultural investment decreases and investment in non-agricultural businesses and migration increase as households gain increased income, consistent with a poverty trap in which households are initially constrained from entering new productive sectors. There is also evidence of large increases in consumption and borrowing.

Pages: 53 pages
Date: 2016-09
New Economics Papers: this item is included in nep-agr, nep-cna and nep-tra
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