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

Production of the agricultural good is assumed to be a quasi-concave technology:
f (L^f , n, A^f ; z^f ) where n represents a composite variable for nonlabor input and z^f

captures other production conditions such as soil quality. We assume that the land and labor
required to produce the agricultural good on-farm are complements; in other words,

lim ∂f ∕∂L=∞, lim ∂f ∕∂A = ∞ and            . Other types of income (e.g., investment

L→0               A^f →0

income, remittances and pensions) are acquired outside of the labor market and do not require
land. We designate the set of these resources by R.

Finally, the household is endowed with a set amount of liquidity, K . 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 of τ^B . The transaction cost
to borrow money represents time and monetary costs of the loan application and disbursement.
The interest rate for the loan is exogenously set and, for simplicity, is set equal to zero in the
model.

The decision of the farmer household is expressed as

Max U(L^l,C;z^c)
L^f ,L^o ,A^gfg ,n
subject to

τ^voL^o(z^o)+ωnA^f ≤K+B+δA^gfg (3)

L^f + L^o + L = L                (4)

A^f = A - Ag^g

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