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



In fact, this study of the impact of Grain for Green on labor allocation in China is part of a
wider set of studies examining the fundamental question of how government payments affect the
off-farm-labor decisions of farmers, a subject of long-time interest to agricultural economists. During the
past three decades, off-farm activities have provided a critical source of income to a majority of farm
households in the U.S. and off-farm provision has been largely responsible for closing the gap in income
between farm and nonfarm households (Ahearn, et al., 2005, Gardner, 1992, Mishra, et al., 2002).

Importantly, nearly all of the research conducted on U.S. farms has found that government
payments to farmers, whether coupled or decoupled from decisions about production of a specific
commodity, have decreased off-farm labor participation (El-Osta and Ahearn, 1996, Mishra and
Goodwin, 1997). For example, Ahearn et al. (2005) found that payments from the Conservation Reserve
Program decreased the likelihood of a farm operator working off the farm.5 These findings suggest that
the substitution effect, which would increase off-farm labor allocation, is outweighed by the income
effect, which would decrease the number of hours allocated to off-farm labor. While these previous
findings suggest a hypothesis that
Grain for Green will lead to decreased off-farm participation, it is
important to ask whether results from the U.S. can be expected to hold up for a developing economy.

In fact, there is reason to believe that the impact of conservation payments in a rural,
developing economy may not follow the U.S. example and may have a positive effect on off-farm labor.
Rural farmers in developing countries have much lower levels of income (and, as such, a higher
marginal utility of income) than farmers in the U.S., so the negative income effect may be small enough
that it is outweighed by the positive substitution effect. Moreover, household preprogram participation in



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