The determinants of farm investment and residential construction in post-reform China

Policy, Research, and External Affairs WORKING PAPERS | - Agricultural Policies Agriculture and Rural Development Department The World Bank August 1990 WPS 471 The Determinants of Farm Investment and Residential Construction in Post-Reform China Gershon Feder, Lawrence J. Lau, Justin Lin, and Xiaopeng Luo Forced consolidation of small Chinese farms into larger farms is unwarranted but China needs mechanisms to facilitate free- market land transactions, better supplies of such inputs as fertilizer, and - when those are available - a reoriented rural credit system. Early extensions of farmers' leases on state- owned land would reassure farmers about the government's ; commitment to the present system. The Pohcy, Research, and Extemal Affatrs Complex distributes PRE Working Papers todisseminate the findings of woik in progress and to encourage the exchange of ideas among Bank staff and all othes interested in development issues. These papers carry the names of the authors, reflect only their views, and should be used and cited accordingly. The findings, interpretations, and conclusions are the authors' own They should not be attributed to the World Bank, its Board of Diectors, its managenent, or any of its member countries.  Policy, Research, and Externt4 Affairs Agricultural Policies WPS 471 This paper -a product of the Agricultural Policies Division, Agriculture and Rural Development Department - is part of an cftort to investigate rural credit markets, f.arm investmecnt, and agricultural productivity in C'hinia. That research is part of a larger effort in PRE to deternine how financial intermediation affects economic activities. Copies are available free from the World Bank, 1818 li Street NW, Washington DC 20433. Please contact Cicely Spooner, room N8-039, extension 3(064 (35 pages). After 20 years oi colleclivization, China's tion with issues of farm size and consolidation agricultural sector was reformned in the last are unwarranted. The production gains from decade. Individual fami/household units re- consolidation would be limited and the costs placed collective production. Households were substantial. given individual leases on forner commune land first for 3-5 years, but now for 15 years, and Where farms are tiny, farm size is a problem even longer for tree crops. -- but coercing consolidation or recollectiviza- tion would be harmful. It would be preferable to Household data on1 four areas in China in introduce institutional mechanisms and proce- 1987-88 revealed pattems of spending on1 dures to facilitate market-induced land transac- productive assets, durable consumer goods, and tions. More mobility of labor would also help. housing. Concems about the inadequacy of invest- Using a model of household production and ment finance for agricultural households are not investment decisions, Feder, Lau, Lin, and Luo yet justified in areas where the supply of such analyzed data on several factors that had been production inputs as fertilizer is unsatisfactory. thoughit to inhibit investment in farm capital and But once the input supply system improves, encourage residential or other nonfarm invest- limited credit will become a constraint - and ments: the typically small size of farms together the rural credit system, which is geared to rural with increasing retunis !o scale in production; industry and commerce, will have to be inadequate credit; and farmers' perceptions of reoriented. insecurity because of possible policy shifts during the life of their leases on state-owned land Radical revision of the land tenure system is or the likelihood of being assigned other lands not called for as the land Ieasing system seems when the contract matures. not to be hampering investment. But likely crosion of investment incentives will be averted What were the policy implications of the if leases are extended before they mature, study results? reassuring farmers about the government's long- term commitment to the present system. If the four study sites reflect the situation elsewhere in China, policymakers' preoccupa- The PRE Working lPaper Scries disseminates the findings of work inder way in the Bank's Policv, Rescarch, and Extemal AffairsComplex. An objective of the scries is to getthcsc firdings out quickly, even if prcsentations arc less than fully polished. The findingc, intcrpretations, and conclusions in these papers do not necessarily represent ofricial Bank policy. Produced by thc PRE Disseminationi Center  The Determinants of Farm Investment and Residential Construction in Post-Reform China* by Gershon Feder, Lawrence J. Lau, Justin Lin, and Luo Xiaopeng Table of Contents I. Introduction 1 II. Description of Study Areas and Surveys 3 III. Factors Potentially hibiting Farm Investment 6 A. Farm size 6 B. Tenure security 6 C. Finance inadequacy 9 IV. Patterms of Investment and Expenditure on Housing 13 and Durables in the Study Areas V. A Model of Household Consumption and Investment 20 VI. Econometric Results 23 VIl. Summary and Conclusions 32 References 35 * The paper benefitted from helpful comments by Richard Burcroff.  1. INTRODUCTION After twenty years of collectivized agriculture, China's agricultural sector underwent a major reform during the last decade. A key element of the reform was the introduction of the "household responsibility system", which replaced the collective production mode by Individual farm household units. Households were given control over former commune land through Individual contracts (Initially for 3-5 years, but presently for 15 years with even longer periods for tree crops). Asido from a commitment to provide certain prespecifled grain quotas at government-set prices, and the obligation to pay taxes, farmers now have the freedom to make cropping and Input decislons, and are allowed to retain any profits which they earn. The Improved Incentives brought about by the Institutional reform, combined with higher prices for key agricultural products, Induced an unprecedented acceleration of agricultural growth In China. Between 1979 and 1984 the value of agricultural output (In constant prices) grew at an average of 7.5 percent per year, mostly due to Improved incentives (Lin, 1988; McMIllan et al., 1989). After 1984, the pace of growth has slackened considerably, essentially because the potential gains due to Improved Incentives under the reformed structure were exhausted. Further growth thus depentJs on the traditlonal sources of agricultural development, I.e., further Investment In physical capital, expanded material Input supplies, and technological change. In this context, the analysis of factors affecting farm Investment In China Is of much policy relevance. National data indicate that along with the reform In production organization, public sector Investment In agriculture declined, In both absolute and relative terms. Agriculture's share In the government's capital  -2- construction exr'nditure fell from 12.5 percent In 1979 to 4.6 percent In 1986. However, the reintroduction of compulsory labor services for maintenance of irrigation Infrastructure was equlvalent to more than half the state's budget for capital construction In agriculture during 1987. Information on farmers' farm Investment Is scant, but there are some indications of a response to the stimull provided by the reform: In 1986 about 90 percent of the purchases of walking tractors, and a rapidly expanding share of truck purchases were by Individual farmers. On-farm investment by farm households has likely been substantial, but It Is not clear to what extent It has been overtaken by households' expenditure on non-productive assets (consumer durables and housing) and non-farm enterprises. Whilo the household responsibility system stimulated production Incentives, It can be argued that concerns regarding the stability of the land tenure system introduced by the reforms, extremely small farm sizes, and credit Inadequacies hinder farm Investment, and may have caused a preference for Investing In non- productive assets (e.g., housing) and In non-agricultural activities. Such arguments have been raised quite frequently by observers of Chinese agriculture, but there has been a paucity of empirical research to assess their validity and importan^e The c.,_Jective of this paper Is to clarify, on the basis of detailed farm level data derived from recent surveys, the importance of factors relatid to tenure security, farm size and credit availability In constralning farmers' agricultural Investment. In particular, a direct measure of farmers' perceptions regarding tenure security will be utilized, as well as Information on transactions In the credit market. The next section provides a description of the study areas.  -3- It Is followed by a discussion of factors affecting farm Investment and a description of Investment patterns in the study areas. A formal model of farmers' consumption and Investment uecisions, and an econometric analysis are then presented and results are Interpreted. The last section summarizes the paper. I1 DESCRPTION OF STUDY AREAS AND SURVEYS The data underlying this study were obtained through recent farm surveys organized by the authors In four countries of China: Gongzhullng county In Jilin Province (December 1987). Tal and . urong counties In Jiangsu Province (March 1988) and Xlajlang county In Jlar -,Al Province (November 1988). The samples consist of agricultural households, Ie., households operating farms as a major activity, as distinct from other rural households which engage In commerce or are mainly employed In rural Industry. Gongzhullng county Is located in Jilin province of northeastern China. Agro-clknatic conditlons are such that only one crop season Is feasible annually, and corn Is the major crop grown. Farm sizes In the study area In Gongzhuling are large relative to typlcal farms sizes In China, and the significant surplus of output over consumption requirements makes the county a leading corn supplier In China. Tal and Jurong counties of Jiangsu province are within the Central East China region where a two-season wheat-rice cycle Is practiced annually. They are characterized by high population density and consequently have very small farm sizes. Many farmers In these counties supplement their Income through off-farm  -4- employment (mostly In township or village enterprises) or non-farm business activitles. X1ljlang county Is located In Jiangxi province of Southern China where double-cropping of rice Is predominant. The county Is a major rice producer, witi typical farm sizes double that of Jiangsu province. Farm fragmentatlon In the study areas In Jilin and Jiangsu province Is less severe than the average for China (which Is 9 tracts per farm). However, In Xlajiang county fragmentatlor, Is a serlous problem, (an average of 16 plots per household) and In Jiangsu tracts are extremely small. Table 1 summarizes some key characteristics of the samples from the study areas. The fow counties covered by the study were purposefully selected from the national sample of 846 countles which are surveyed annually by the State Statistical Bureau. Each of the counties were deemed typical of the agro-clinatic reglon In which It Is located. The samples consisted of severa randomly selected townships within each county, and within each township a number of ranooly selected villages, with a total sample size of about 200 farmers per county. Both Gongzhuling and Xlajlang are surplus grain producing counties, while Tal and Jurong, where population density Is very high, have less grain surplus as farm sizes area very small. Farmers were asked In the course of Interviews to provide information on their farm operations, assets (at present and In the past), credit markot transactions, and perceptions regarding tenure security.  Table 1: Character'tics of Sample Farm Households County Gongzhullng Tal Jurong Xlajlang Item (N-200) (N-200) (N1-199) (N-200) 1 Mean farm size 20.75 4.63 6.90 11.31 (Mu) a/ 2. Share of Income 18 47 47 15 from non-farm sources 3. Per capita Income 952 737 832 472 b/ In 1987/88 Yuan 4. Mean No. of land 3.7 7.05 4.90 16 parcels per HH 5. Main crop corn wheat (winter) wheat Irvter) Rice (double (single season) Rice (Summer) Rice (o. ier) cropping) a/ 15 Mu - 1 hectare _/ One season hi 1988 only  -6 111. FACTORS POTENTIALLY INHBITING FAM INVES1IENT A. Farm size. If productlon exhlbits Increasing returns to scale (at least within the relevant range), then larger farms will tend to have larger capital/land ratios, provided that supplies of other Inputs or credit are not constrained.1 Put differently, with Increasing returns to scale the consolidation of farms would load to higher Investment and land productivity. Farm sizes In China are typically small even when compared to other Asian countries (.55 hectare per household Is the national average), and their effective size Is further diminished by fragmentation (the national average Is about 9 parcels per farm). Some policy makers In China argue that the small farm sizes brought about by the shift Into household-based production have hindered Investment, and have called for partlal recollectivizatlon and consolidation. The perception of Increasing returns to scale relies In part on the observation that some capital goods are not divisible (e.g. tractors and draft animals). However, various arrangements have evolved In China's agriculture to circumvent this proWem. In some areas, communal equipment and draft animals have been sold or assigned to selected households who committed to provide draft services to other farmers at agreed rates. In other areas, shared ownership of animals and equipment among several households Is practiced. B. Tenure securlty. Under the household responsibility system, farmers do not own the land, but have a lease protecting their use rights for the duration of the 1 A sufficient condition for this propositlon to hold when the productlon function is homogenous Is that Inputs are complementary In productijn (i.e., positive cross second derivatives).  -7- contract. For most types of Investments, a duration of 15 years as practiced at present may be viewed as sufficiently long to amortize animals and equipment. Uncertainty may however prevall In farmers' mind regarding the possibility that a change In government pollcy (whether at the central o.. ocal level) would lead into a reallocation, before the contract expires, of some or all of the land over which they hold a contract. If some or all of the land Is taken away, farmers with excess capital may suffer losses even If the capital Is mobile (i.e., not tled to the land). This Is because of the transaction cost of liquidating capital. In addition to the risk of reallocation of land, farmers may be concerned about a possibility of a reversal of the individualizdtlon policy, leading to some form of consolidation and collective operation. This possibility entails uncertainties regarding the treatment of privately owned production capital. The risks outlined above can diminish the Incentive to Invest In farming capital (e.g., equipment, machinery and draft animals), but are less likely to affect Investment in livestock (pigs, poultry, etc.) as these have a short paycoff period and will most likely remain in private ownership regardless of policy changes. Insights regarding farmers' tenure security perceptions can be derived from responses to specific questions pertalning to the po3sibillty of land reallocatlon. These questions were Included In the f,lrvey underlying the present study. As Indicated In Table 2, In three of the counties studled, only a minority of the farmers perceive a hlgh likelihood of lanJ reallocation before the current contract expires. In contrast, in Xlajlang county three-quarters of the farmers expect land reallocation before the contract expires, I.e., a majority of the farmers In the courty do not have much faith In authorities' commitment to the present allocation. This result Is compatible with the fact that the survey In Xlajlang county took  Table 2: Farmers Perceptions Regarding Security of Tenure County Item Gongzhullng Tal Jurong Xlajiang (N-200) (N-200) (N-199) (N-200) X of farmers 17 17 24 75 perceiving high likelihood of contract disruptlon before expiration date X of farmers 85 76 78 59 percelving low likelihood of being reassigned the same farms after contract expiration date place much later than In the other counties (November 1988). By the time of the survey, there have been several well publicized incidents In several areas of China durlng the second half of 1988 where local authorities forced consolidation of small farms. The changed Insecurity perceptions In Xlajlang are not likely to have had an impact on the Investment data underlying the present study, as these pertain to the poriod 1984-88. A longer-term perspective underlies the responses to a question regarding the likelihood of being assigned the same traccs of land upon contract expIration. The majority of farmers In all counties perceive low likelihood of regalning use rights to the same tracts of land. While the risk of not being asslgned the same parcels of land would clearly have a negative effect on land-embodied Investment,  -9- It may also hamper Investment In mobile capital (e.g., machines), because uncertainty regarding re..location of plots can Imply also uncertalnty regarding the future size of the farm and thus uncertainty regarding tPe marginal productivity of capital once the contract explres. However, when there Is a relatively long- term land lease, concerns regarding future farm size would not have a strong kmpact on Investment during the first years, as It will be fully or almost fully depreclated by contract expiration date. Investment In housing Is viewed by Chinese farmers as completely risk free, because hcuses have been privately owned even In the years of collective agriculture, and are likely to remain privately owned. It sihould be further noted that housing Is a consumption Item with high Incc... o elasticily. The income effect Is augmented by demographic factors. In China's rural areas, a new house has become a precondition for marriage eligibility for young males. With the coming of age of Individuals born In the baby boom of the ear!y 60's, the demand for housing has Increased. These facts, and the substantlal pent-up demand due to the absence of any significant housing Investment In the pre-reform years could produce a maJor adJustment In the housing stocK once Incomes have rlsen and private construction activities have become feasible. C. Finance Inadequacy Credit constralnts can be another factor Inhibiting investment. Most Investment outlays (and housing Investment as well) ten, to be lumpy, requirlng a substantlal amount of liquld resources. Because of this lumpiness, the necessary funds cannot typically be saved from one year's Income, and long or medlum-torm credit, or accumulated savings, are needed to finance Investment. Aggregate statistics Indicate that the share of medium and long-term loans In the portfolio of the rural credit cooperatives (the main lending institutlon  - 10 - deallng with agricultiral households) is a mere 3 percent (World Bank, 1988a, P. 258). In the areas covered by the present study, the share of short term loans out of all Institutlonal loans varles between 90 percent and 100 percent in the four counties (Feder et al., 1989). It Is possible, of course, to finance investment by repeatedly rolling over short-term loans. In fact, the structure of Interest rates In China provided Incentives for such a rollover, as Interest rates on short-term production loans were lower than Interest rates on medium-term loans throughout the period under study (World Bank, 1988b, paper 7, annex 1, Table 10). However, short-term loans are typically granted In smaller amounts. Theoretically, when liquidity (and credit in particular) Is fungible, a shortage of credit would affect all types of Investment (whether productive or residential). However, deficiencies and segmentatlon (by source and purpose) of credit markets could create a situation whereby funds which are available for housing Investment cannot be used for productive Investment. An assessment of the operation of credit markets In rural Chins Is thus necessary In order to determine the role of credit constralnts In explalning the o!tserved Investment patterns. Sources and uses of credit In the study areas are presented In Table 3, which describes the composition of loans undertaken by sample farmers In the most recent season prior to the Interview. The boilk of institutlonal credit Is declared to be destined for production (input purchase) as Is Indeed Intended by government's policy. However, most Institutional credit Is de-facto fungible, regardless of the stated objectives for which It Is acquired, and It Is likely that short-term production credit could be used to finance Investment In farm capital or housing. The extent to which rolled-over short-term Institutional credit could substitute for medium and long-term funds Is probably lknited, because amounts  - 11 - are typically small, and the need to repeatedly roll over the loans Introduces an element of uncertainty and Inconvenience. In rural China, non Institutional credit Is less likely to be fungible, because It Is granted mostly free of Interest by relatives and friends, who have close knowledge of the activities and financial resources of the borrowers. Unlike Institutional credit, which Is by-and-large short-term, Informal credit In the study areas Is mostly medium and long term, or has no definite maturity date (Feder et al., 1989). It Is likely that relatives and friends are more Inclined to lend money for purposes of house construction and special social events (e.g. weddings) which are perceived as a basic need deserving assistance. They are less likely to provide Interest-free loans for agricultural Investment which Is undertaken for the purpose of Increasing the borrower's Income. Table 3 Indlcates that a higher share of non-institutional credit Is devoted to purposes not related to production, and a significant proportion of It Is used to finance constructlon rather than productive Investment. Because of their ability to monitor borrowers activitles, loans acquired from relatives and friends are typically used for the specific purposes for which they were granted, and thus do not add to overall liquidity. It Is therefore expected that Informal credit Is not available as a significant source of funding for farm Investment In the study areas.  Table_3: Distribution of Loan Purposes by Type of Lender (Percent) Purpose Sample Production Farm Construction Consumption Social Other Size Machinery (Wedding, Funeral, etc) County and (loans) Source Gmzning Institutional 212 93.0 4.0 2.0 0 1.0 0 NMn-Institutional 47 11.0 4.0 23.0 15.0 26.0 21.0 Tai Institutional 57 89.0 2.0 4.0 0 0 3.0 Nm-institutioral 25 36.0 0 32.0 0 20.0 12.0 Jurong Institutional 29 48.0 10.0 10.0 3.0 10.0 19.0 Nm-Institutional 31 6.0 19.0 29.0 13.0 23.0 10.0 Xiajiang Institutional 158 67.9 3.8 5.8 1.3 8.4 14.8 Nb-Institutional 85 33.8 1.5 28.0 9.2 20.0 9.5  - 13 - NI. PATTERNS OF INVESTIENT AND EXPENDITURE ON HOUSING AND DURABLE! iN THE STUDY AREAS The Implementation of reforms In China's agricultural sector coincided with other economic changes which made various consumer goods more available in both urban and rural areas. Thus the increased Incomes and savings could be used for acquisitlon of consumer durables, an expense of significant magnitude relative to typical farm Incomes. Table 4 compares ownership of several major consumer durables (T.V.,radio/tape, bicycle, sewing machine, watch) at two points In time: 1983, which In the study areas was a year when the new production mode was at Initial stages of Implementation, and 1988 (or 1987 In the case of Gongzhullng) when the reform was well In place, and farmers had already benefitted from several years of higher Incomes. All Items show significant Increases. The most remarkable change occurred In ownership of T.V.'s which Increased by hundreds of percent In all countles. Consumer durables are obviously private property which wl!l not be affected by any changes In government's policies In the agricultural sector. Investments In productive farm assets have been substantlal, compared to initlal levels of capital In the study areas. As demonstrated In Table 5, capital stocks (livestock and equipment) have more than doubled In the 4-5 year period covered by the data, Implying annual growth rates of capital exceeding 15 percent.2 This represents significant real growth, as the price Index of agricultural equlpment rose by only 15 percent over the whole pe lod covered. 2 The survey covered several types of land improvements, such as clearlng of stumps and constructing bunds, but there was llttle variatlon In the data as most of these Improvements were already undertaken before the reforms. Other types of improvements were difficult to quantify.  - 14 - As one would expect, the highest volume of Investment per household took place In Gongzhullng and Xiajlang where farms are larger. Table 4: Changes In Ownership of Consumer Durables in Study Areas County, Year Gongzhullng Jurong Tal Xlajiang (N-200) (N-199) (N-200) (N-200) :em 1983 1987 1983 1988 1983 1988 1983 1988 Own 1.V. 6 42 11 38 2 26 5 48 Own radio/tape 3 14 2 17 2 12 34 44 g. no. of .62 .98 1.14 1.33 1.10 1.43 1.02 1.26 bicycle , own sewing 46 57 22 37 11 33 10 19 machine =wn watch 64 83 68 94 53 91 59 82  - 15 - Table 5: Cumulative Productive Investment In the Period 1983-1988 a/ (sample means In Yuan) County Gongzhullng Jurong Tal Xlajiang Item (N-200) (N-199) (N-200) (N-200) Crop-related Investment (i) Tractor 309 139 0 95 (11) Other equlpment 173 82 42 127 (ill) Draft anknal 200 76 12 357 Sub-total 682 297 54 579 Other Productive Investment (i) Truck/boat 120 0 123 0 (ni) Livestock 104 214 150 556 Sub-total 224 214 273 556 Total Productive Investment 906 511 327 1135 Total productive Investment 159% 127% 131% 107% as % of initlal capital a/ Figures for Gongzhullng are for the period 1983-1987, while the figures for other counties pertain to the perlod 1984-1988. The figures are undeflated. The price Index for agricultural equipment Increased by 15 percent between 1983/4 and 1987/8.  - 16 - The composition of Investments differs across the countles studied. Food animals (plgs, chicken) are a major component of investments In Xlajlang and Tal county. Draf t power (mechanized or anInial) composes over one half of the Investment In Gongzhuling, where farm sizes are the largest among the study areas. In Tal county, where canals are numerous, farmers Invest In boats (which are used for transportation). The figures reported for Investment In tractors and trucks may be misleading, because tractors are expensive and they raise the sample mean slgnlficantly even though only a few households have acquired them. For this reason It Is useful to observe the changes In the frequency of ownership for different capital Items, reported In Table 6. It Is noted that even In Gongzhullng, less than 10 percent of the households own tractors. The most common form of Investment Is In pigs, which constitute In all counties except Gongzhullng about 40-50 percent of productive Investment. Investment In house construction or housing Improvement Is a major form of asset accumulation for farmers In China (Tam, 1988). Table 7 describes several types of housing knprovements undertaken by sample farmers, such as the Installation of tile or tin roofs Instead of straw, and the replacement of dirt floors by concrete. Slgnificant Improvements are observed In housing standards In all study areas, and about half of the sampled farmers Indicated that they have Invested In housing Improvement or expansion since 1983. The volume of funds Invested In housing Improvement Is substantial. On average, the outlay on house Improvements for households undertaking such Improvements was more than thelr average annual Income, exceeding productive Investment by a wide margin (last llne In Table 7). The share of housing Investment In the total outlay on productive Investment and  - 17- housing knprovement ranges from 64 percent In Xlajlang to 91 percent in Tal county. Some possible reasons for the heavy Investment In housing, which are not related to any of the factors potentially inhlbiting productive investment, have already been mentioned In sectlon 11 above (e.g., demographic trends and hlgh Income elasticity). But It Is also possible that some of the factors hampering Incentives for productive Investment Induce an asset composition more heavily dominated by residential capital (e.g., limited tenure security, segmented credit markets, and small farm size). These Issues need to be Investigated empirically, but prior to the econometric analysis a formal model needs to be presented to underly the empirical work.  - 18 - Table 6: Changes In Productive Assets % Who Own Gongzhullng Tal Jurong Xlajlang (N-200) (N-200) (N-199) (N-200) 1983 1987 1983 1987 1983 1987 1984 1988 Tractor 1 9.5 0 0 3.5 8.0 4.0 5.5 Truck/boat 0 0.5 4.5 26.0 0 0 0 0 Pump engine 1 2 0 1.5 6 11.5 0.5 1.5 Thresher 0 3 0 0.5 2.5 12 92.0 97.0 Buffalo/oxen 5 19 0 3.0 53 77 94.5 92.5 Pigs 81 66 86.5 66.5 85 84.5 97.5 98.5 Other anknals 15 30 .5 0 1.5 0 0.5 0.5 Average value per household (yuan) a/ 570 1476 250 577 403 914 1060 2195 a/ The values are not deflated. The price Index for agricultural equipment rose by 15 percent between 1983/4 and 1987/8.  - 19 - Table 7: kmprovements In Housing County, Year Gongzhullng Jurong Tal Xiajlang (N-200) (N-199) (N-200) (N-200) :em 1983 1987 1983 1988 1983 1988 1983 1988 with non-straw roof 22 51 94 98 51 85 99 99 with non-earth floor 11 23 12 27 15 44 14 36 with non-earth wall 22 48 85 95 51 85 69 80 who Invested In housing 60 47 68 46 rovement since 1983 g. size of housing nvestment (Yuan) a/ 4, 35 3,792 5,233 4,506 Ratio of housing Inprovement 2.71 3.57 10.88 1.82 nvestment to productive nvestment b/ I Calculated for the subsample of Individuals with housing klprovement. Calculated for whole sample.  - 20 - V. A Model of Houseiold Consumption and investment Consider a household maxlmizing its utility over a two-period planning horizon. Utility Is defined over a composite consumption good (C) and over housing services (H). For simplicity, we assume separability of utillty. T - UO(CO) + Vo(Ho) + U1(Cj) + V1(Hj) (1) where T Is total utility. U and V are respectively the utilitles from composito consumption and housing services, and the numerical subscripts denote tine perlods. The time discount factor Is omitted for simplicity, as It can be embodied In the definitlon of U, and V1. The household has an Initial endowment of financlal resources Wo, which Is augmented with borrowed funds L. These resources can be used In the first period for consumption (Co), Investment in productive assets (I) and Investment In housing (h). Other Initlal endowments are capital (K0), land (Ao) and housing (Ho). These are assumed liliquld and cannot therefore be used for financing consumption or Investment. The budget constraint Is given by W9 + L a I + h + CO (2) In the second pe.-od, If no change In the land endowment occurs, the augmented capital stock (that Is, Initial capltal plus first period Investment) Is combined wlth the initlal land endowment to produce output via a neoclassical production function. Consumption In the second period Is then the value of output minus the debt repayment. However, If agriculture Is recollectivized or the land Is taken away (an event with probability P), then the farmer receives only  - 21 - some fixed future Income Y, all debt Is cancelled, and production capital Is taken over by the state. 3 Second period consumption Is therefore C1 - F(Ko + l, Ao) - (1+r)*L with probability 1-P (3) C1 ' Y with probability P (4) where F Is the production function and r Is the Interest rate. Maxuization of the expected value of utility subject to equations (2), (3), (4) Is equivalent to Max UO(W0+L-1-h) + VO(HO) + (1-P) * U1l(F(K0+l,Ao) - (1+r)#L)l l,h + P*U1(Y) + V,(Ho + h) (5) First order conditions for optimum require -U + (1-P) * U; * Fk '