Conservation Payments, Liquidity Constraints and Off-Farm Labor: Impact of the Grain for Green Program on Rural Households in China

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land constraints as well as the choice to allocate land to the conservation set-aside program. Here we
provide a sketch of the model; the full model is described in Appendix 1.

We consider a farm household that maximizes utility, which is defined by consumption of
leisure and a composite consumption good. In maximizing its utility, the household faces four
constraints: a time constraint, a land constraint, a liquidity constraint and a full income constraint. First,
the household’s time endowment is divided among working on-farm, working off-farm in a
wage-earning activity and leisure. To work off the farm, the household incurs variable transaction costs
(e.g., transportation costs) and fixed transaction costs (e.g., job-search costs or start-up costs for a
family-owned business). Second, the household’s land endowment is divided among cultivated land that
can be used for agricultural production and the conservation set-aside program. The government
compensates the household for program participation at a fixed rate per unit of land. We assume that the
land and labor required to produce the agricultural good on-farm are complements. Third, the household
is endowed with a certain amount of liquidity. Expenditures on nonlabor input for farm production plus
the (variable) transaction costs that a household faces when it wants to participate in off-farm work are
limited to the sum of the value of the household’s liquidity, which is the sum of its liquid asset, the
amount borrowed and the compensation from land retirement. Households may have to seek credit to
finance farm production or to work off-farm. If a household chooses to borrow an amount B, it incurs a
fixed transaction cost, representing time and monetary costs of the loan application and disbursement.

Finally, the full income constraint limits consumption to income from off-farm labor, profits from

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