Determinants of Factor Misallocation in Agricultural Production and Implications for Agricultural Supply-side Reform in China

Allocative inefficiency in agriculture is an issue puzzling researchers and policy-makers in China. Based on household data from the China Family Panel Studies of 2012, the present paper quantifies the potential distortions in China's agricultural production and examines their underlying determinants across regions. The results reveal that there are different levels of distortions across regions. The Middle region is facing the greatest distortion. Increases in machinery input, the proportion of non-farm income and effective labor input will reduce distortions. Household saving, farmland rent and farmland size are significantly positively related to distortions. There is a complementary effect between labor and farmland in alleviating production inefficiency, but substitution effects exist between capital and farmland and also capital and labor. The increase in farmland size will aggravate the impact of capital on distortions. Given the constraint of super small-scale farmland, facilitating land transfer is a necessary precondition for improving allocative efficiency.