and Liu 1997),<sup>2</sup> whose failure to capitalize on rapidly increasing opportunities led to productive inefficiency (Benjamin and Brandt 2002). Initially on an informal basis, decentralized land transfers thus complemented and gradually overtook administrative mechanisms (Yao 2000, Kung 2002). Still, renting out of land by a migrant or a person engaging in local off-farm activities could be perceived as a signal that the land was no longer required and could be subjected to administrative reallocation (Yang 1997, Brandt _et al._ 2004). Higher tenure security therefore emerged as precondition for more active rental markets to foster evolution of a vibrant off-farm economy.

To respond to this, and in line with results from local land tenure experiments (Kung 2006), legal measures to strengthen tenure security were put in place, first through the 1998 Land Management Law and then the 2003 Rural Land Contracting Law. In response, land rental markets, which had been virtually non-existent by the mid-1990s, emerged rapidly, with participation rates above 10% in 2001 (Deininger and Jin 2005). Migration and non-farm employment motivate an increasing number of households to move out of agriculture (Rozelle _et al._ 1999b, de Brauw _et al._ 2000), with far-reaching social and economic implications (Zhao 2002). China thus provides an ideal setting to explore impacts of land rental on productivity and household welfare and factors determining participation in such markets in settings where non-agricultural growth and differential ability are emerging as main drivers of adjustments through factor markets (Liu _et al._ 1998, Zhai and Wang 2002).

# **2.2 Data and descriptive evidence**

Our empirical investigation is based on a 4-period panel (2001-2004) of almost 8,000 households in about 800 villages that is representative of China’s 9 agriculturally most important provinces.<sup>3</sup> Household level information is from the ongoing consumption survey conducted by the Rural Survey Team of China’s National Bureau of Statistics (NBS) that includes detail on demography, assets, income, expenditure, agricultural production, and land market participation and is generally considered to be a very high quality survey (Jalan and Ravallion 1999). These data are complemented by a village level schedule, answered by local leaders based on administrative records, that obtains information on levels of income, migration, key endowments, institutional arrangements (e.g. no. of land use certificates issued) and land use regulations and land market restrictions from 1999 onwards. Finally, a supplemental questionnaire administered to households involved in land transactions elicits information on contractual details, current and past occupation and income levels by the respondent and his or her partner, and revenue from agricultural production on the land plot before it was rented.<sup>4</sup>

> 2 Exchanges of land within the village had been prohibited before the 1986 Land Management Law legalized them. Transfers to outsiders remained illegal until allowed in 1998, although without clarifying specific modalities to be followed (Li 2003).

> 3 Earlier analysis of rental markets in China assessed differences in outcomes between rental markets and government reallocation whereas here the emphasis is on the size of the efficiency impact of land rental and factors that could prevent market operation. Correspondingly, in this paper determinants of renting in and out are modeled and estimated jointly rather than through simple probit models as was done earlier. Moreover, data coverage is greatly expanded, covering the China’s 9 key agricultural provinces over a 4-year period rather than just three poor southwestern ones for a much shorter panel.

> 4 The fact that these data rely on recall and in part refer to income or productivity by another household may lead to concern about bias. For panel households, checking the consistency of recall against earlier income levels pointed towards some noise (see below). In cases where both parties were present, cross checks conducted during the pre-test of the survey instrument pointed towards a high level of consistency

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