Farmland Rents and the Relationship with Confidence in Local Institutions in India: A Ricardian Analysis
Description
Research Question and Background: It is argued that a strong and significant presence of local governments, banks, community groups etc., which work to protect the rights of people, can play an important role in promoting social welfare. These entities uphold the rules, norms, shared strategies (Crawford and Ostrom, 1995), or arrangements that both liberate and constrain choice behavior in repeated interactions between people, by overseeing their actions or outcomes. Greater confidence in such institutional arrangements, leads to greater cooperation and increased social capital, which in-turn generates economic development. North (1990) defines institutional arrangements (institutions) as the “rules of the game, or humanly-devised constraints that shape human interaction." Renting out of agricultural lands is a widespread phenomenon in India. This happens mostly because landowners (traditionally known as “Zamindars” [Driver, 1949]) are averse towards the risks associated with agriculture and hence they provide their lands to farmers in return of a rent. Also, small, and marginal farmers are less likely to own lands by themselves, therefore cropping in a rented land is their only option. However, there exist significant concerns regarding whether both landowners and farmers benefit from these transactions (Tongia, 2019). While landowners can exploit farmers through a host of channels like farm output, selling of produce, availability of irrigation sources, stringent controls on type of harvest etc., farmers with greater associations with unions, political parties and other groups, may violate the informal agreements (common in rural areas) with their landowners, causing serious losses for them. In many cases, both landowners and tenants remain heavily involved in cropping on a given parcel of land, which allows both parties to share the production risk (Chaudhuri and Maitra, 2007). As well, small farmers face several challenges in the access to inputs and marketing (Mahendra Dev, 2012). Thus, the institutional arrangements or the rules of the game, formal and (especially) informal – implemented and overseen by organizations like courts, banks, police, panchayats etc., that exist and vary across communities/villages are especially critical in this kind of marginal agriculture setup. This implies that, confidence in such arrangements are essential for maximizing the benefits of both farmers and landowners. The objective of this analysis is to investigate whether the level of confidence in institutions, which can vary greatly across rural agricultural villages, is reflected in land markets (or being capitalized into farmland rents) in India. A Ricardian Analysis (analogous to Hedonic Pricing Method) is used to estimate variation in farm rents for lands dedicated towards production of three major kinds of crops (Rabi, Zaid and Kharif) produced in the country, due to confidence in local institutions in rural areas in India, while controlling for other factors such as community participation, land area, mode of irrigation and seasonal variation in rainfall. The question that is specifically asked is: Do farm rents in rural India depend on people’s confidence in local institutions? Data and Statistical Methods: The analysis uses household level data from two rounds of India Human Development Survey (IHDS, 2002 & 2011). It is assumed that the expressed rents taken from the survey adequately represent the market prices (or rents) and that rent payers or receivers of a given parcel of land can identify the land size and the primary mode of irrigation. An index of confidence in institutions (representing confidence in institutional arrangements) is constructed through the method of Principal Component Analysis, by using binary indicators of households’ confidence in Politicians, Banks, Courts, State Governments, and Village Panchayats. This index is the primary explanatory variable of interest. The analysis also includes information on households’ membership in community groups. Additionally, state-wise information on monthly rainfall are used from the Indian Meteorological Survey (IMS, 2002 & 2011), and rainfall in different cropping seasons are interacted with land areas. Results: OLS results (for each survey round and for the Pooled data) indicate a significant positive relationship between farm rents and the constructed index of confidence in local institutions after controlling for other factors. Upon accounting for the endogeneity in this index, where it is instrumented by a different index of the responding household’s men’s exposure to mass media (newspapers, radio, and TV), an even stronger impact on farm rents is observed. In the latter case, a 2SLS strategy is adopted.
Farmland Rents and the Relationship with Confidence in Local Institutions in India: A Ricardian Analysis
Research Question and Background: It is argued that a strong and significant presence of local governments, banks, community groups etc., which work to protect the rights of people, can play an important role in promoting social welfare. These entities uphold the rules, norms, shared strategies (Crawford and Ostrom, 1995), or arrangements that both liberate and constrain choice behavior in repeated interactions between people, by overseeing their actions or outcomes. Greater confidence in such institutional arrangements, leads to greater cooperation and increased social capital, which in-turn generates economic development. North (1990) defines institutional arrangements (institutions) as the “rules of the game, or humanly-devised constraints that shape human interaction." Renting out of agricultural lands is a widespread phenomenon in India. This happens mostly because landowners (traditionally known as “Zamindars” [Driver, 1949]) are averse towards the risks associated with agriculture and hence they provide their lands to farmers in return of a rent. Also, small, and marginal farmers are less likely to own lands by themselves, therefore cropping in a rented land is their only option. However, there exist significant concerns regarding whether both landowners and farmers benefit from these transactions (Tongia, 2019). While landowners can exploit farmers through a host of channels like farm output, selling of produce, availability of irrigation sources, stringent controls on type of harvest etc., farmers with greater associations with unions, political parties and other groups, may violate the informal agreements (common in rural areas) with their landowners, causing serious losses for them. In many cases, both landowners and tenants remain heavily involved in cropping on a given parcel of land, which allows both parties to share the production risk (Chaudhuri and Maitra, 2007). As well, small farmers face several challenges in the access to inputs and marketing (Mahendra Dev, 2012). Thus, the institutional arrangements or the rules of the game, formal and (especially) informal – implemented and overseen by organizations like courts, banks, police, panchayats etc., that exist and vary across communities/villages are especially critical in this kind of marginal agriculture setup. This implies that, confidence in such arrangements are essential for maximizing the benefits of both farmers and landowners. The objective of this analysis is to investigate whether the level of confidence in institutions, which can vary greatly across rural agricultural villages, is reflected in land markets (or being capitalized into farmland rents) in India. A Ricardian Analysis (analogous to Hedonic Pricing Method) is used to estimate variation in farm rents for lands dedicated towards production of three major kinds of crops (Rabi, Zaid and Kharif) produced in the country, due to confidence in local institutions in rural areas in India, while controlling for other factors such as community participation, land area, mode of irrigation and seasonal variation in rainfall. The question that is specifically asked is: Do farm rents in rural India depend on people’s confidence in local institutions? Data and Statistical Methods: The analysis uses household level data from two rounds of India Human Development Survey (IHDS, 2002 & 2011). It is assumed that the expressed rents taken from the survey adequately represent the market prices (or rents) and that rent payers or receivers of a given parcel of land can identify the land size and the primary mode of irrigation. An index of confidence in institutions (representing confidence in institutional arrangements) is constructed through the method of Principal Component Analysis, by using binary indicators of households’ confidence in Politicians, Banks, Courts, State Governments, and Village Panchayats. This index is the primary explanatory variable of interest. The analysis also includes information on households’ membership in community groups. Additionally, state-wise information on monthly rainfall are used from the Indian Meteorological Survey (IMS, 2002 & 2011), and rainfall in different cropping seasons are interacted with land areas. Results: OLS results (for each survey round and for the Pooled data) indicate a significant positive relationship between farm rents and the constructed index of confidence in local institutions after controlling for other factors. Upon accounting for the endogeneity in this index, where it is instrumented by a different index of the responding household’s men’s exposure to mass media (newspapers, radio, and TV), an even stronger impact on farm rents is observed. In the latter case, a 2SLS strategy is adopted.