off-farm labor markets may be inhibited by low incomes (and the absence of liquidity to finance the shift
into the off-farm market) as well as poorly functioning land and credit markets (Bardhan and Udry, 1999,
Hoff and Stiglitz, 1990). Since land rental markets are frequently incomplete in rural China, most
households cannot leave agriculture entirely (Nyberg and Rozelle, 1999). Furthermore, rural farmers in
developing economies may be more likely to face high transaction costs and fixed/variable costs that
prevent them from participating in off-farm labor, particularly for activities involving new
self-employment or migration. To the extent that government payments can relax the liquidity
constraints of rural farmers, incentive programs may help rural farmers obtain jobs off the farm and
facilitate the structural transformation of households and the economies within which household
members live and work.
The literature suggests that this conjecture may apply to rural China. A combination of high
transaction costs, weak information-sharing and other regulations has been shown to restrict farmers in
rural China from starting self-employment enterprises and seeking wage-earning jobs (deBrauw, 2002,
Knight and Song, 2005). Although comprehensive investigations of credit markets in rural China have
been rare, case studies suggest that, though formal and informal loans are available, borrowing remains
severely constrained, especially for the resource-poor strata of the population (International Fund for
Agricultural Development, 2001). Credit constraints have been shown to affect factor allocation in the
production decisions of rural China’s households (Feder, et al., 1990). Given these conditions, if the
Grain for Green program can increase liquidity for farmers, the program may enable them to find jobs
off the farm and increase other productive activities.