Leight Grain Into Gold Cornell

Grain into gold?
The impact of agricultural income shocks on

rural Chinese households
Jessica Leight
April 9, 2014
Abstract
This paper seeks to estimate the effect of positive lump-sum income shocks experienced by
Chinese households beginning in 1993, analyzing the evolution of an unusual grain quota
system. This system mandated that households sell part of their grain output to the state at
a below-market price that increased over time, generating positive income shocks that varied
cross-sectionally in accordance with crop composition. The identification strategy seeks to
exploit climatic variation in the propensity to cultivate different crops in conjunction with
variation in the quota price over time to identify quasi-random variation in the size of the
income shocks. The results suggest that investment in agriculture falls as households gain
increased income, while there are sharp increases in non-staple consumption; there is also
evidence of increased employment in state-owned enterprises and in household industrial
enterprises. This is consistent with the hypothesis that increased growth in agriculture
could lead to increased investment in non-agricultural activities.
Introduction
The question of the degree of complementarity between agricultural and industrial development
has long been of primary interest to economists. A substantial literature written in the early
postwar years argued that dramatic growth in agriculture was the necessary prerequisite for any
similar industrial take-off in the developing world (Lewis 1954, Nurkse 1953, Rostow 1960).
At the same time, an alternate view prominently espoused by Hirschman (1958) held that
agriculture had few linkages to stimulate growth in other sectors of the economy and thus
the emphasis should be on unbalanced growth that favored industry. More recently, policy
analysts have cited the East Asian miracle economies as well as a range of other case studies as
evidence that substantial agricultural growth has to precede industrial expansion in a developing
economy (Birdsall, Ross & Sabot 1995, Mellor 1995).
Clearly, an increase in the return on investments in agriculture will generate both a substitution effect, unambiguously positive for investments in agriculture, and a positive income
shock for rural households. Theorists of positive linkages between agricultural and industrial
Preliminary and not for citation. Email: jessica.leight@williams.edu
growth have variously argued that this increase in agricultural income leads to an increase in
demand for agricultural inputs or consumption goods that engenders industrial growth; generates outmigration of labor into other sectors; or stimulates new investments by rural households
in non-agricultural activities. Identifying the effect of a quasi-exogenous increase in agricultural
income on rural households economic decisions can serve to clarify whether any of these hypotheses hold, and potentially contribute to the ongoing debate about the relationship between
agricultural and industrial growth.
This paper estimates the impact of a large positive income shock to agricultural households
on investment in agriculture and non-agricultural activities as well as consumption in rural
China. In the post-1983 period, all rural households in China were required to sell a fixed quota
of grain to the state at a below-market price as part of the so-called Household Responsibility
System implemented following decollectivization and described in more detail below. However,
the central government began to raise this price rapidly in the mid-1990s (Huang & Rozelle
2002), a shift that was equivalent to a large reduction in the size of the lump-sum tax imposed
on rural households (Huang 1998), or conversely, a sizeable positive income shock. Crucially,
however, the size of this shock varied systematically as a function of the composition of crops
cultivated, given the stark difference in the treatment of different crops under the quota system
(Huang, Rozelle, Ha & Li 2002).
The identification strategy in this paper exploits this cross-sectional variation in a differencein-difference framework that compares the patterns of investment in agricultural and nonagricultural activities over time in households that receive income shocks of varying sizes as
a result of the increase in quota prices. Predominantly rice-growing areas systematically experience larger income shocks given that they are subject to larger mandatory quota quantities than
predominantly wheat-growing areas. While cultivation of rice is itself an endogenous household
decision, the specification of interest will analyze the impact of increasing quota income for
areas that have a greater propensity to cultivate rice based on their climatic conditions, conditional on province-year fixed effects. Moreover, the rural Chinese context is a particularly
fruitful one in which to examine the impact of rural income shocks given that widespread rural
industrialization allows for many households to diversify over a range of economic activities,
and allows the identification of changes in this pattern of diversification over time.
The results show that an increase in income leads to a decrease in agricultural investment
and an increase in non-agricultural investment as well as labor outside the household. There is
also a substantial increase in consumption, particularly of non-staple goods, and a large increase
in borrowing. This suggests that the income effect on agricultural investment is negative, while
it is positive for a range of measures of investment in non-agricultural activities. Moreover, the
implied magnitudes are substantial: the local average treatment effect suggests that each 100
yuan (approximately $15) of quota income earned by households induced to cultivate rice by
their climatic conditions increases their probability of starting an industrial household business
or obtaining external employment in a state-owned enterprise by 50%.
The results are robust to a series of specification checks. There is no evidence that these
patterns reflect differential shocks in policy or other output prices that are correlated with the
quota price, or differential trends in areas with different climates. There is also no evidence
that the results reflect strategic behavior by households designed to manipulate the assigned
quota quantity, or differential quota enforcement.
This paper contributes to the extant literature on the relationship between economic and
industrial development at the micro level. In the theoretical literature, Matsiyama (1992) argues that the relationship between industrial and agricultural growth should depend on the
relative openness of the local economy, and Kogel & Prskawetz (2001) construct a two-sector
model in which an increase in agricultural productivity matches the stylized facts of the British
Industrial Revolution. Empirically, research has been hampered by the absence of many plausibly exogenous shocks to local economic development. Reardon, Delgado & Matlon (1992)
analyze the relationship between rural income and income diversification in Burkina Faso and
also provide a summary of an older literature analyzing correlations between income and entry
into new rural sectors in both South Asia and Africa.
More recently, Foster & Rosenzweig (2004) estimate the impact of shocks to the returns
to agriculture in India induced by the adoption of Green Revolution technology and find that
industrial growth is fastest in areas where agricultural growth is lagging. Jedwab (2011) analyzes
cocoa booms in Ghana and Ivory Coast and finds that positive price shocks in cocoa lead to
an increase in urbanization. Kaboski & Townsend (2011) evaluate the impact of a governmentsponsored microcredit program as a major income shock in rural Thailand on consumption and
investment, but do not consider effects across different sectors.
A related literature has examined the impact of government cash transfer programs on
household investment and entry into new sectors. Gertler, Martinez & Rubio-Codina (2012)
and Sadoulet, de Janvry & Davis (2001) find that households who benefit from cash transfer
programs in Mexico invest cash transfers in productive assets, resulting in a long-term increase in
consumption; Gilligan, Hoddinott & Taffesse (2008) find similar results examining a government
assistance program in Ethiopia. Other literature found that old-age pensions in South Africa
lead to increased migration (Ardington, Case & Hosegood 2009), in contrast to earlier work
that found that the pension lead to a decrease in labor supply by prime-age adults (Bertrand,
Mullainathan & Miller 2003).
The paper proceeds as follows. Section 2 outlines the institutional structure facing rural
Chinese households in this period, and Section 3 describes the data. Section 4 presents the
identification strategy and the first stage. Sections 5 and 6 presents the two-stage least squares
results and a set of robustness checks, and Section 7 concludes.
2
2.1
Institutional background
Household Responsibility System in China
Between 1962 and 1978, agricultural production in China was highly collectivized. The primary
unit of production was the so-called production team, a unit consisting of 20 to 30 households
that jointly farmed agricultural land and sold the resulting output, distributing the associated
income to participating laborers according to a system of workpoints intended to reward labor,
skill and political commitment. The team farming system followed an even more extreme form
of collectivization implemented during the Great Leap Forward between 1958 and 1962, in which
land and labor were collectivized in communes of 6,000-8,000 households (Chinn 1979).
Throughout this period of institutional change, the overarching imperative of agricultural
policy under Mao was to maximize grain production in order to subsidize the politically important urban population and support a major drive to industrialization, a goal enforced using
substantial mandatory production quotas and low procurement prices. By 1978, the cumulative
impact of these policies in the agricultural sector was disastrous, leading to low rural income,
land degradation and a severe undersupply of non-grain crops (Walker 1984).
As a result, the new government led by Deng Xiaoping, acceding to power shortly after
Mao Zedongs death, introduced major changes in agricultural policy. First, the household was
reinstated as the primary unit of agricultural production under a system variously known as
household contracting or the household responsibility system. Each household was provided
with an allocation of contract land for its own use, while land title continued to be held
by the village. Land was also subject to periodic mandatory reallocations by village leaders
(Keliang, Prosterman, Jianping, Ping, Reidinger & Yiwen 2007).
The household also committed to the delivery of a fixed amount of quota grain sold to the
state at a preset price, in addition to taxes paid. Excess production could then either be sold
to the state at a higher, above-quota price, or at rural markets (Lin 1992), with the household
having full rights over residual, post-quota income. At the same time, the states system of
agricultural targets and agricultural procurement was overhauled. Prices for government procurement of most agricultural goods, previously so low that they often did not cover costs, were
raised substantially. In addition, the previous complex system of targets for sown area, inputs,
production and yield for a variety of agricultural productions was simplified to government
procurement targets for key agricultural goods only (Lin 1992).
These changes were implemented in a piecemeal fashion between 1979 and 1983, beginning
with a few isolated provincial or local experiments, and subsequently spreading widely to a point
of almost total decollectivization by the end of 1983 (Unger 1985). The establishment of the
household responsibility system led to a substantial increase in the growth rate of agricultural
output, which had been only 2% over the previous 25 years. Between 1978 and 1984, agricultural
output increased nearly 8% annually. One analysis estimated that roughly half of this growth
was due to increased use of inputs, particularly fertilizer, and half to the assignment of land use
rights to households via the household responsibility system (Lin 1992).
2.2
Grain policy
A key dimension of agricultural policy in the post-Mao period has been mandatory grain procurement by the state, widely known as the grain quota system. The grain procurement system
has also been the subject of repeated reforms since 1983, usually occurring in a cycle in which
an attempt at liberalization of sales is followed by inflation or declining supplies and then a

rapid retrenchment.
In 1985, it was announced for the first time that procurement contracts were to become
voluntary, a change retracted the following year. In 1993, there was another abortive attempt
at liberalization in which the central government announced that the grain bureaus responsible
for procurement in rural areas would be privatized and thus converted into trading companies.
This initiative was held in check and then reversed following a drop in production and a rise in
prices (Sicular 1995). These periodic reversals reflect a consistent stance of governmental unease
toward grain markets and their inclination to regularly impose new controls on those markets
to ensure procurement targets are met and the goal of self-sufficiency in grain production is not
imperiled (Oi 1999).1
Following the abandonment of these attempts at reform, the quota system has remained in
place with no major structural changes. The evidence suggests that grain quotas are mandatory
and enforced. The volume of grain quotas did decline after 1995 relative to earlier in the decade;
subsequent surveys have found that state procurement accounts for 25-30% of rural households
grain output (Dewen Wang & Rozelle 2003, Sicular 1995). Dewen Wang & Rozelle (2003)
provide a detailed analysis of the mechanics of the operation of the quota system during the
period examined here. Quota prices were set by the central government, while quota quantities
in form of grain deliverable per household were generally set by county leaders for all villages
within their jurisdiction, and varied with village characteristics. The authors also confirm that
the quota obligation uniformly comprises well less than total production.
In the primary sample of interest in this analysis, quota sales account on average for 10%
of rural households grain output between 1993 and 2002. Figure 1 shows a histogram of quota
quantity as a proportion of total grain quantity produced at the household level (averaged over
all years in which the household is observed). It is evident that the vast majority of households
sell less than 20% of their total output as quota sales. While there is no direct evidence about
quota enforcement (i.e., quota sales as a proportion of the quota quantity fixed) in the primary
years of analysis, evidence from earlier surveys in the same sample suggests that 95% of quota
quantity contracted is delivered.2 Households who fail to produce the quota quantity may face
the obligation either to purchase grain at the market price and resell it to the government,
or pay the equivalent in cash. Empirically, evidence from this dataset suggests both cases are
rare.3
More importantly, there was a substantial increase in procurement prices beginning in 1995
1
Commercial production of grain in China has remained minimal. Literature about the evolution of agriculture
has noted that production of pork, poultry and eggs has shifted to commercial farms, but there is no evidence of
important commercial production in other crops (Fuller, Beghin, Cara, Fabiosa, Fang & Matthey 2003).
2
Village leaders report the quota quantity contracted in surveys in 1990, 1991 and 1993; households report
this data in surveys between 1986 and 1991.
3
In this data, village leaders report in surveys in 1990, 1991 and 1993 what fraction of overall quota sales
in their village were re-sales of purchase grain or cash payments by households who did not produce the grain
themselves; these sales accounted for only 1.5% and 6% of total quota sales, respectively. Households also report
in surveys between 1986 and 1991 what fraction of their quota sales corresponded to re-sales and cash payments,
and report these unusual sales were equal to 1.4% and 1.7% of the total, respectively.
in response to declining production and an increased emphasis on grain self-sufficiency at the

provincial level (Huang & Rozelle 2002). This increase has been identified as one of the key
factors in the dramatic decline in rural poverty observed in China in the 1990s (Ravallion &
Chen 2007), and is equivalent to a reduction in the magnitude of the lump-sum tax imposed on
farmers via the mandatory quota system (Huang 1998).
It is also useful to note that quota policy was far from monolithic, and in particular, the
treatment of different grains was very different. Rice consistently was the crop most heavily
penalized by the quota policy. Procurement prices for rice were lower, and rose more slowly. In
addition, the quota quantity consistently constituted a higher proportion of total production for
rice producers than for wheat producers (Huang et al. 2002). Quota policy penalized rice more
heavily because first, the government particularly valued the establishment of large stocks of
government-owned rice in order to meet urban demand for its consumption, and second, wheat
and other grain crops were subject to greater competition from imports. The identification
strategy in this paper will exploit this systematic variation in quota policy by crop in order to
generate cross-sectional variation in the magnitude of the income shock induced by shifts in the
quota price over time.
2.3
Conceptual framework
This section will outline a very simple conceptual framework that will be useful in describing
the quota policys effects. Assume households produce grain output G, and quantity Q must be
sold at the quota price Pq . Remaining output is sold at the market price Pm . The quota price
is fixed prior to the harvest; the market price is determined following the harvest and can take
one of two values. A higher market price is denoted Pm and a low market price is denoted P m .
Households income I under the quota system can thus be written as follows.
I = QPq + (G Q)Pm
(1)
The implicit lump-sum tax imposed by the quota system is Q(Pm Pq ). The size of this implicit
tax varies with the state of the world in a given year: it will be larger when the market price is
higher, and smaller when the market price is lower. Accordingly, the quota serves to dampen
the variability of income in a given year. An increase in the quota price Pq will increase mean
income, while the variance of income across states in a given year will be unaffected (i.e., the
risk-dampening function of the quota system will be maintained).
Data
The data employed here is the China Research Center for the Rural Economy (RCRE) panel,
collected in a sample of 299 villages in 13 provinces in China every year between 1986 and 2001,
excluding 1992 and 1994. A randomly selected sample of households in each surveyed village
forms the panel; the mean number of households in a village-year cell is 69. The surveys prior to
1993 were considerably briefer and did not collect data on a number of the outcomes of interest
in this paper; accordingly, the primary analysis is restricted to the post-1993 panel.
In addition, the analysis employs climatic data from a network of stations in China collected
by the Carbon Dioxide Information Analysis Center (CDIAC); both temperature and precipitation are recorded on a monthly basis. Using data on the latitude and longitude of the county
centroid, measures of temperature for each county and year are constructed from the station
data by interpolating using the inverse distance weighting method. Each interpolation employs
only data from stations within 150 kilometers of the county centroid.
This data set also provides data on the locally measured price for both mandatory grain
quota sales and market sales, which is useful in light of the widespread heterogeneity in grain
policy already discussed.4 Both the quota and the market price are observed at the household
level, and calculated by dividing the reported household value of sales at the market (quota)
price by the reported household quantity of sales at that price. Crucially, grain quota sales are
not reported separately by type of grain. Accordingly, it is only possible to estimate a mean
quota price in each village-year cell; the price cannot be accurately measured for various types
of grain.
Figure 2a shows the market and quota price of grain by year between 1993 and 2002. A large
gap between the quota price and market price is evident early in the period, despite the fact
that both market and quota prices are increasing; in 1993, the quota price is 30% lower than
the market price. By the end of the period, the quota price is nearly equal to the market price
(around 3% lower on average). Figure 2b shows the quota and market price in the full sample
of surveys beginning in 1986. The data between 1986 and 1991 will not be employed in the
primary analysis due to the absence of a number of primary outcomes of interest as discussed
above, but will be used in robustness checks.
While the price for grain quota sales varies over time, some of this variation is driven by
underlying variation in the market price. Accordingly, the mean quota price in each village v
in province p in year t is regressed on the corresponding market price in the following equation;
vp denotes a village fixed effect for village v in province p that absorbs any systematic crosssectional variation in price. Observations corresponding to the top and bottom 1% of observed
market and quota prices are trimmed to avoid undue influence of outliers.5
q
m
Pvpt
= Pvpt
+ vp + vpt
(2)
The residual from this regression is denoted Pvpt .

4
After they have fulfilled their grain quota, rural households also have the option to sell their excess production
to the government at a higher, negotiated procurement price. Huang et al. (2002) provide data that these
negotiated procurement prices are generally intermediate between the quota price and the wholesale market
price. In this data, it is impossible to distinguish between genuine market sales and sales at the higher price paid
by government buyers. However, no distinction is made between these two types of sales, as both represent the
price that the rural producer would face for the marginal unit of production, which is generally not the quota
price. The market price is thus used to denote the price for marginal grain sales.
5
This regression is run at the village-year level, rather than at the household level, due to the large number of
missing variables at the household level corresponding to households that report no market sales in a given year.
At the village-year level, every village-year cell has sufficient data to estimate a market price and a quota price.
It is important to note that this measure of the price wedge between the quota and market
price is by construction uncorrelated with the year-on-year variation in the market price. Pvpt
captures only the component of the quota price that does not reflect underlying variation in the
market price. In the primary analysis, it will be used as an instrument for the observed quota
price to capture variation in the magnitude of the income shock to the household represented
by shifts in the quota price over time.
Table 1 provides some summary statistics about the primary sample. The average household
consists of four members, cultivating an area of around 1.4 hectares primarily in grain. 90%
of households own at least one productive asset (e.g., animals, tools or machinery); around
a third of them report a non-agricultural business, and more than half report that at least
one household member is engaged in labor outside the household. Net income is around $800
annually, or around $200 per capita.
Identification strategy
4.1
Variation in crops and quota quantity
The primary independent variable of interest in this analysis is quota income, defined as the
income received by households from their grain quota sales. Quota income shifts over time and
space as a function of changes in both the quota quantity and the quota price. Analysis of
government quota policy in China typically indicates that quota quantities, once set by county
leaders, change only incrementally, while the central government has discretion over the grain
quota price and will change it annually in accordance with shifting policy goals (Rozelle, Park,
Huang & Jin 2000, Lin 1991). Accordingly, a plausible null hypothesis is that the primary source
of variation in quota income stems from cross-sectional variation in quota quantity interacted
with a time-varying price: R = Q P .
This hypothesis can be confirmed in the data. Table 2 shows the results from a series of
regressions that decompose the variation in quota quantity and price across space and time.
The first four columns show regressions of the quota quantity and then the price on village
fixed effects and year fixed effects; note the measure employed here is again the quota price
residual, P . As predicted, village fixed effects account for around 30% of the variation in quota
quantity, while year fixed effects account for only 1%. For the quota price, however, the results
are exactly inverted: village fixed effects account for less than 1% of the variation in the quota
price, and year fixed effects account for nearly 50%.
Accordingly, it seems plausible to employ a time-invariant, cross-sectional variable correlated
with quota quantity and interact it with price P in order to generate an instrument for quota
income. Given the widespread discussion in the literature of the systematic cross-sectional
differences in quota policy implementation that corresponds to variation in crop composition,
variation in the propensity to cultivate rice heavily penalized by the quota system will be
the key source of variation this analysis will exploit.
In China, as in other countries, the suitability of a particular area for rice cultivation is
partially determined by temperature: more specifically, the total accumulated temperature

over a year for days with temperature greater than 10 degrees Celsius. Analysis of the ecology
of rice cultivation in China has argued that the cumulative temperature must exceed 2000
degrees to cultivate one rice crop and 4500 degrees to cultivate two crops (Shao, Fan, Liu, Xiao,
Ross, Brisco, Brown & Staples 2001). This induces an (unsurprising) correlation between the
average temperature and area of land cultivated in rice, as well as in this context the
quota quantity.
The key temperature variable employed in this analysis will be the mean cumulative temperature of days with temperature greater than 10 degrees Celsius over the years recorded from
1986 to 1994, the period corresponding to the panel years of the RCRE survey in which weather
station data has been published.6 This variable, denoted total temperature, is then normalized
to have mean zero and standard deviation one.
Correlations between the temperature variable as constructed and area cultivated in rice can
then be estimated, conditional on province-year fixed effects; standard errors are clustered at the
level of the county, the level at which temperature is measured. Note that for the vast majority
of the sample, only one village is sampled in each county, and thus cross-village heterogeneity is
roughly equivalent to cross-county heterogeneity.7 Province-year fixed effects are denoted pt ,
area cultivated in rice by household i in village v, province p and year t is denoted Aivpt and
quota quantity is denoted Qivpt . The equations of interest are thus written as follows:
Aivpt = T empvp + pt + ivpt
(3)
Qivpt = T empvp + pt + ivpt
(4)
Columns 5 and 6 of Table 2 show the results, suggesting that a one standard deviation
increase in the total temperature increases the area cultivated in rice by about 31% and the
quota quantity by around 45% for localities within the same province and year. This is an effect
of substantial magnitude, and it does not rely on the cross-provincial heterogeneity evident in
China between southern provinces that primarily cultivate rice and northern provinces that
primarily cultivate wheat. In this data set, about 50% of the variation in the rice area cultivated
is accounted for by province-year fixed effects. Accordingly, the identification strategy exploits
about half of the variation in crop area.
4.2
First stage
This analysis suggests that temperature interacted with a time-varying measure of quota price
may be an appropriate instrument for quota income. Column 1 of Table 3 shows the first stage
of interest, regressing quota income on the interaction of temperature and price conditional on
village and province-year fixed effects; standard errors are clustered at the village-year level.8
6
Because the data only reports monthly mean temperature, not daily mean, the mean monthly temperature
is imputed to every day within that month.
7
There are only seven pairs of villages located in the same county out of 149 villages in the core sample.
8
The top 5% of observations of quota income are trimmed to remove the influence of outliers.
Again, the price variable employed is uncorrelated with the market price.
Rivpt = T empvp Pvpt + vp + pt + ivpt
(5)
A one-standard deviation increase in the interacted instrument leads to an increase in quota

income of around 15%, and the relationship has substantial predictive power with a F-statistic
around 22. Column (2) shows the first stage with the sample restricted to villages that are
homogeneous in rice or wheat cultivation. This will be the primary first stage of interest, and
the sample restriction and its justification will be outlined further in the next section. The
exclusion restriction for this specification requires that an increase in the quota price has no
differential impact across areas with different climatic conditions, as measured by the total
temperature, other than a varying lump-sum income shock.
4.3
Specification checks
There are a number of potential challenges to this specification. First, the quota price could
in fact be a price shock, rather than a pure income shock. Second, the implicit decomposition
of quota income postulated is Q P , where Q is treated as time-fixed and endogenous and P
as time-varying and exogenous. However, there could be changes in quota quantity over time
that are also correlated with the instrument (a first stage in Q), or systematic cross-sectional
variation in price (a first stage in P ) that would render this decomposition invalid. Third, shifts
in temperature could induce systematic changes in quota income other than those mediated by
changes in rice area cultivated. Each of these potential challenges will be addressed in turn.
Quota price as an income shock The key assumption throughout this analysis is that
the quota price is not the price of the marginal unit of grain sold and thus does not affect
a households decision about the optimal level of production; i.e., a shift in the quota price
is an income effect rather than a price effect. However, there are several ways in which this
assumption could be violated: substitution in and out of agriculture, substitution between crops,
and the presence of households for which quota production is equal to total production.
The first potential channel for a price effect of the quota price is relevant if shifts in the
quota price induce households to substitute in and out of agriculture entirely. The status of
rural households who are not cultivating grain in the quota system is unclear; some surveys
have found that these households are still required to provide grain they have purchased or
an equivalent cash payment, even if they do not cultivate grain themselves (Brandt, Rozelle &
Turner 2004). Regardless of whether these households are completely exempt or are subject to
an equivalent tax, however, when they optimize their production decisions and decide whether
to cultivate grain again in the next year, the quota price represents the price of the marginal
unit of grain production.
Unsurprisingly, however, complete exit from grain cultivation is rare among rural households
in China; only 10% of households in the sample report even one year in which they do not
cultivate grain, and on average these households still report cultivation in about half the years
10
surveyed. However, for analytical clarity, all households that do not report grain cultivation in
every year have been dropped from the analysis to focus purely on households for whom a shift
in quota price can be viewed unambiguously as an income shock. Importantly, this population
of households that are not purely agricultural is balanced across areas of different temperature,
and thus dropping these households does not create differential patterns of selection into the
sample in treatment and control areas.
This strategy may pose a challenge for external validity, as the resulting estimates cannot be
extrapolated to households for whom exiting agriculture entirely is a meaningful counterfactual.
However, given the extremely small number of households that show this pattern and the
fact that a much more common empirical regularity as will be elaborated further below
is households that simultaneously pursue agricultural production, non-agricultural household
production and/or employment outside the household this does not seem to be a major
concern.
A second channel through which an income effect could be a price effect is if households
switch crops in response to changes in the quota price and begin selling a larger quantity of
rice as their mandated quota (rather than the smaller mandated quantity of wheat) when the
price increases. While this may not systematically be a logical decision if the quota price
remains below the market price, as it does on average, it could be locally optimal if the quota
price is close to the market price in some village-years. In this case, if households have some
discretion over the quantity they sell, then a change in the quota price can no longer be plausibly
interpreted as a change in a lump-sum tax. Alternatively, if non-compliant or partially compliant
households choose to comply with the quota system when the price increases, this could also
be problematic for the identification strategy. For these households, the marginal price remains
the market price throughout, but the characteristics of the households earning quota income
may then be systematically different when the price is high compared to when the price is low.
In order to test this hypothesis, villages are classified as heterogeneous or homogeneous in
the primary grain crops of interest (rice or wheat) using a simple rule: any village in which
the total amount of both rice and wheat cultivated over all households and years reported
exceeds zero are denoted as heterogeneous cultivators.9 The remaining villages (constituting
approximately 57% of all observations) are classified as homogeneous cultivators. The test used
to designate a village as homogeneous is quite stringent in order to ensure that the resulting
classification truly reflects climatic suitability for rice and wheat and not individual selection
into different crops.
Columns 3 and 4 of Table 3 show the results of the following regression, estimated for both
homogeneous and heterogeneous villages, denoted Hom and Het respectively. Standard
errors are clustered at the village-year level.
Qivpt = Pvpt + vp + ivpt
(6)
The objective is to test whether quota quantity varies year-on-year with changes in quota price,
9
Observations reporting cultivation of less than .01 hectare rounded down to zero.
11
conditional on cross-sectional fixed effects, in homogeneous and heterogeneous villages.

The results show that the relationship in homogeneous villages is close to zero and insignificant, while the coefficient in heterogeneous villages is large and significant. This suggests that
either households are crop-switching or there are other inconsistencies in quota implementation
in heterogeneous areas that allow for differential compliance, a reasonable assumption given
that enforcement of grain policies is likely to be more challenging in these areas. Accordingly,
the primary sample will also be restricted to villages that are homogeneous in grain production
of rice or wheat. This also applies to subsequent specification checks reported in Table 3.
A third channel through which the income effect of quota production could become a price
effect is if households are constrained in quota production: i.e., they are selling all their grain
production as quota production. Only around 1% of household-years in the relevant sample
report grain production equal to quota sales; accordingly, this does not seem to be a large firstorder effect. Columns 5 and 6 of the same table show the results of the following regression,
where Civpt is a dummy for households that are constrained in quota production. The objective
is to test whether there are more constrained households (in levels) in areas with different total
temperature, or a significant shift in the number of constrained households in areas with different temperature when the price begins to increase. Both coefficients are highly insignificant,
suggesting that households on the margin of quota production are not a significant source of
bias in these results.
Civpt = T empvp + pt + ivpt
(7)
Civpt = T empvp Pvpt + vp + pt + ivpt
(8)
Decomposition of quota income Columns 7 and 8 of Table 3 show the results of two
regressions that test the decomposition of quota income. The objective of these regressions is
to check whether residual variation in quantity over time and variation in quota price can be
treated as exogenous conditional on province-year fixed effects: i.e., to test whether there is a
first stage in Q or P . To do so, equation (3) is re-estimated with new dependent variables
Qres,ivt , defined below, and Pvt , the quota price.
Qres,ivt = T empvp + pt + ivpt
(9)
Pvt = T empvp + pt + ivpt
(10)
Qres,ivt is defined as the residual from regressing the quota quantity Qivpt on village fixed
effects, corresponding to the residual variation in quota quantity after cross-sectional variation
by village is partialled out:
Qivpt = vp + ivpt
(11)
The results show coefficients that are small in magnitude relative to the standard deviation
of the dependent variable (both are around .05 of a standard deviation) and insignificant,
12
confirming the hypothesis that the only robust correlation is between mean quota quantity by
village and temperature.10
Relationship between climatic conditions and quota quantity The proposed specification also assumes that the positive relationship between a climatic measure of the propensity
to cultivate rice and quota quantity is mediated entirely by change in the area of rice cultivated. If this were not the case, then it could be that areas with different climatic conditions
are endogenously selecting into higher quota quantities due to unobserved political or economic
characteristics, and this correlation could be problematic if these unobserved characteristics are
also time-varying in conjunction with the quota price.
In order to test this hypothesis, a second residual is estimated from the regression of quota
quantity on the area cultivated in rice:
Qivpt = Aivpt + ivpt
(12)
This residual is denoted Qares,ivt and is regressed on the temperature measure in the following
specification.
Qares,ivt = T empvp + vp + ivpt
(13)
The results are shown in Column 7 of Table 3. The relationship between the quota quantity
residual and the temperature measure is small in magnitude (around .17 of a standard deviation)
and statistically insignificant. Thus again, there is no strong evidence that a shift in climate is
correlated with changes in other unobservable characteristics beyond the relationship with rice
area.
To sum up, the specification checks are consistent with the shocks to quota income representing income shocks that vary cross-sectionally in accordance with temperature and propensity
to cultivate rice, and over time as the quota price varies. Again the first stage of interest,
restricting the sample to homogeneous villages only, is shown in Column (2) of Table 3. The F
statistic is 13, indicating that weak instrument bias is not a major challenge for this analysis.
Alternate climatic measures This analysis may raise the question about why temperature
is used as a primary measure of propensity to cultivate rice, rather than rainfall, given that
rainfall is also widely identified as a key determinant of the suitability of a region for ricegrowing. Unsurprisingly, there is also a correlation between mean reported rainfall and the
area cultivated in rice and in this sample. However, the correlation between rainfall and quota
quantity is weak and inconsistent, primarily because (unlike temperature) there also seems to
be a direct relationship between rainfall and quota quantity that is not mediated through rice
area: in other words, the test implemented by estimating equation (13) fails.
10
This result may initially seem counterintuitive given the evidence in the literature cited above that the mean
quota price is also generally lower for rice, which would be expected to induce a similar correlation between quota
price and a propensity to cultivate rice. In fact, this correlation is evident in a cross-section across provinces, but
not within provinces. Residual price variation within a province-year is idiosyncratic.
13
In fact, there is a relatively strong independent relationship between rainfall and industrial
employment (conditional on province-year fixed effects), and the literature has highlighted that
areas with greater relative industrialization generally have lower grain quotas (Dewen Wang &
Rozelle 2003). This independent correlation renders the first stage between rainfall and quota
quantity weak. For temperature, the comparable correlation between total temperature and
industrial employment is weak and statistically insignificant (T-statistic of 1.2). The results
will be tested for robustness to potential bias induced by varying industrialization correlated
with climatic conditions in Section 6.
Results
5.1
Ordinary least squares
The ordinary least squares specification of interest can be written as follows, where Xivpt denotes
economic outcomes of interest and the primary independent variable is Iivp,t1 , lagged income
from grain quota payments. Village and province-year fixed effects are included, and standard
errors are clustered at the village-year level.
Xivpt = Iivp,t1 + vp + pt + ivpt
(14)
Eight summary measures will be employed as dependent variables: agricultural sown area and
production, agricultural inputs, non-agricultural labor and investment, labor outside the household, migration, grain consumption, non-grain consumption, and borrowing. For each class of
outcome, summary variables are generated by standardizing each variable to have mean zero
and standard deviation one and calculating the mean. For the ordinary least square specification, only the results for the summary outcomes are reported, with the full set of results
provided in the appendix.11
This specification has a clear source of bias: namely, the endogenous determination of
quota quantity by county leaders. Dewen Wang & Rozelle (2003) find in regressing quota
quantity on a range of explanatory variables at the village level in a multivariate framework
that quota quantity is generally positively correlated with both income and the relative salience
of agriculture. Evidence on this point can also be drawn from this dataset by regressing the
same economic outcomes of interest Xivpt on quota quantity in 1993, Q1993
ivp , again with village
11
The summary measure for agricultural production is the mean of total area sown, area sown in grain, wheat,
rice and cash crops, and grain and cotton produced. The summary measure for agricultural inputs is the mean
of quantity of grain seeds, cash crop seeds and fertilizer employed as well as dummy variables for owning any
agricultural assets, tools, animals or machinery. Non-agricultural investment is the mean of dummy variables
for investing labor or capital in an industrial, construction, transportation or retail household business. Outside
labor is the mean of a dummy variable for working in an outside enterprise and working in a collective, SOE
or private enterprise. Migration is the mean of dummy variables for working outside the township or outside
the county, a dummy equal to one if there is a reported change in household size, and a dummy for receiving
remittances. Grain consumption is quantity grain reported consumed; non-grain consumption is the mean of
vegetables, oil, meat, milk, eggs and sugar consumed. The summary measure for borrowing is simply the variable
for whether a household has obtained a loan.
14
and province-year fixed effects.

Xivpt = Q1993
ivp + vp + pt + ivpt
(15)
This regression captures whether households with greater quota quantities at the start of the
period show differential patterns in primary economic outcomes in subsequent years, conditional
on village and province-year fixed effects. The results shown in Panel A of Table 4 show
coefficients that are generally strongly positive: households with higher quota quantities at the
start of the period show more rapid growth in agricultural inputs and outputs, are more likely
to report non-agricultural household businesses and to migrate, and consume more grain and
non-grain items. Accordingly, the OLS estimates are expected to show strong upward bias on
measures of investment in agriculture and non-agricultural businesses, as well as an upward bias
on measures of consumption.
Panel B of Table 4 reports the OLS estimates, where quota income is measured in hundreds
of yuan. All the coefficients are positive, though the coefficients on outside labor and borrowing
are insignificant. The magnitudes imply an increase in quota income of 100 yuan (around $16
dollars) leads to an increase in agricultural investment of between .4 and .6 standard deviations,
and an increase in consumption of between .2 and .6 standard deviations.
5.2
Two-stage least squares
Panel C of Table 4 shows the results from re-estimating (14) in a two-stage least squares
framework, employing T empvp Pvp,t1 as an instrument for Iivp,t1 . This table reports only
the summary measures; the full set of regression results is reported in Table 5.
The first notable result in Columns 1 and 2 in Panel C is that the sign of the estimated
coefficients for agricultural production and agricultural inputs is reversed, and those coefficients
are now negative and significant: in other words, the marginal complier household, induced to
experience a larger increase in quota income because of the climatic suitability of its land for
rice, actually invests less in agriculture. A hundred-yuan increase in quota income in the prior
year leads to a decline of around .7 standard deviations in a mean variable of agricultural sown
area and production, and the disaggregated results in Panel A of Table 5 show a decline in
every measure of agricultural area sown and production (sown area in grain, wheat, rice and
cash crops, and production of grain and cotton, the primary cash crop).
There is also a decrease of around .4 standard deviations in agricultural inputs. Disaggregated results show a significant negative impact on the value of grain seeds purchased and the
probability of owning an agricultural asset. There is no significant impact on cash seeds or the
value of fertilizer employed, while the probabilities of owning an animal or tools and machinery
as agricultural assets exhibit imprecisely estimated declines.
The coefficient in Panel C Column (3) of Table 4 suggests there is no significant average
effect on the probability of investing in a non-agricultural household enterprise, while the disaggregated results in Panel C of Table 5 show results for dummy variables for investing labor or
capital in enterprises of each enumerated type. There is evidence of an increase in the probabil15
ity of supplying labor to a household industrial enterprise and a corresponding decline in retail
that roughly counterbalance each other, suggesting households may be creating new types of
businesses. There is no effect on the probability of non-labor investment in a non-agricultural
activity.
For outside employment, by contrast, the coefficient on the summary variable for outside
employment is relatively large, around .24 standard deviations, albeit imprecisely estimated.
This increase is clearly driven by a large increase in the probability of employment in a stateowned enterprise, evident in Panel D of Table 5. No effect is detected on migration, which may
be surprising given that it could be hypothesized that households would use an income windfall
to fund the transactional costs of labor migration. However, these results should be considered
with the caveat households may have motives to misreport migration, either because it is not
officially sanctioned or to maximize the size of the village-allocated land plot to which they are
entitled.
Finally, Columns (5) through (8) in Panel C of the summary measures suggest large positive
effects on the consumption of non-grain (i.e., non-staple foods) and on borrowing, with no effect
on consumption of staple grains.12 The aggregate consumption variable increases by a full
standard deviation, primarily driven by large increases in consumption of meat, sugar and eggs
shown in the disaggregated results in Panel E of Table 5. The probability of accessing credit
increases 8 points on a base probability of 18 percent, a relative increase of nearly 50%.
Taken together, these results suggest that rural households in China that experience income
shocks show a clear pattern of behavior. They disinvest in agriculture i.e., the income effect
for agriculture is negative and seek to establish industrial household businesses or obtain wage
employment in state enterprises. They also consume more luxury goods, and access substantial
new sources of personal loans.
Comparing the OLS and 2SLS results, the differences between the two specifications seem
consistent with the evidence of differential trends for high quota quantity villages presented in
Panel A of Table 4. Households with greater quota quantities early in the period show more
rapid increases in agricultural area and production, agricultural inputs, migration and grain
consumption; the OLS estimates show a strong positive bias relative to the 2SLS estimates in
each case. There was no evidence of differential trends for outside labor or borrowing, where
the OLS estimates are not significantly different from the 2SLS estimates. The only two cases
in which the differential trend is not consistent with the bias are non-agricultural labor (where
the OLS and 2SLS estimates are not significantly different), and non-grain consumption, where
the OLS estimate is in fact biased downwards.
To assess the magnitude of the estimated effects in the two-stage least squares specification,
in this sample the mean quota quantity is 200 kilograms and the increase in the quota price from
trough to peak is around .4 yuan per kilogram (from 1 yuan/kilogram to 1.4 yuan/kilogram),
12
Previous research in Jensen (2008) presented experimental evidence that rice and wheat are Giffen goods for
households in poverty in urban areas in China, suggesting a negative income effect. There is no robust evidence
of a negative income effect in this data, though it cannot be ruled out; it is also plausible that the demand curves
of grain for rural and urban households may be very different.
16
implying an increase in quota income of around 80 yuan, or a proportionate increase of 40%.

Given that the coefficients are per 100 yuan of quota income, the effective magnitudes of the
effect observed over this period are around 20% lower than the magnitudes indicated by the
coefficients reported here.
Relative to household net income, the average level of quota income is only around 3% for
households at the median, with the caveat that net income may be measured very imprecisely.
However, for households at or below the 25% percentile of income, the average level of quota
income jumps to around 20% of net income. For these households, the change in quota policy
thus generates a permanent increase in annual income of almost 5% - a shift that seems to have
large implications for their economic decisions.
Robustness checks
This section presents a number of robustness checks on the primary results. First, I run placebo
tests in a pre-period where the quota price exhibited limited variation. Second, I show that the
quota price is not correlated with any systematic cross-sectional shocks in either policy or prices
that could be a source of bias. Third, I re-estimate the primary specification with controls for
the lagged market price, as well as separate time trends in areas with differing temperatures
and differing levels of industrial employment. Fourth, I examine evidence of strategic household
behavior in the determination of the quota quantity, and strategic quota enforcement.
6.1
Placebo tests
The fundamental identifying assumption of the main analysis requires that there is no unobserved variable correlated with fluctuations in the quota price that also has a disparate impact
across areas with different climatic conditions. A useful test of this assumption is to evaluate
whether trends in major economic outcomes are parallel between those areas in a period without
major changes in the quota price.
Between 1986 and 1991, the quota price P , again defined as the unexplained residual in a
regression of market on quota price, showed no major fluctuations; this is evident in Figure
2b. Accordingly, I can evaluate whether parallel trends are observed across areas with different
total temperature in this period, using a more limited set of outcomes that are reported in these
earlier surveys.13 In order to implement this test, I regress the economic outcomes of interest
on village fixed effects and an interaction between province fixed effects and a linear time trend.
Xivpt = vp + p t
(16)
13
Agricultural area is the mean of total area sown, grain area sown, cash area sown, and grain production;
agricultural inputs is the mean of dummy variables for owning any productive asset and dummy variables for
owning animals, tools or machinery; non-agricultural business in the mean of dummy variables for investing any
labor or capital into the specified types of non-agricultural businesses; migration is the mean of dummy variables
for working outside the township or outside the county, a dummy equal to one if there is a reported change
in household size, and a dummy for receiving remittances; and grain consumption is quantity grain reported
consumed.
17
The residuals from this regression are then plotted by year, dividing the sample of villages into
high-temperature and low-temperature villages based on whether the primary measure of total
temperature is above or below the median.
The graphs are shown in Figure 3. Trends over this period seem generally parallel for
agricultural area sown, migration and grain consumption. For agricultural inputs, there is some
divergence early in the period but the trends align after 1988, and there is some evidence that
non-agricultural labor is increasing more rapidly in low-temperature areas after 1990. However,
there is no evidence of systematically diverging trends that would be a major source of bias.
6.2
Shocks correlated with quota price
The existence of other shocks correlated with changes in the quota price that also exhibit systematic cross-sectional variation would also be problematic for the postulated identification
strategy. In order to test whether there is evidence of this type of shock, I estimate the primary
reduced form specification employing two sets of dependent variables. The first includes measures of the price of agricultural output sold for the most commonly produced crops; the second
includes a number of local policy variables, including the number of local officials recorded in the
sample, taxes and collective fees.14 The dependent variables are normalized to have mean zero
and standard deviation one, and the equation estimated for each outcome Yivpt is the following:
Yivpt = T empvp Pvpt + vp + pt + ivpt
(17)
The results are shown in Table 6. The first regression in each panel shows the result of
a regression employing a summary variable that is the mean of the other variables estimated,
and the coefficients are insignificant for both summary measures. In Panel A, the price of three
crops is significantly correlated with the instrument, though the effects are small in magnitude,
less than .1 of a standard deviation. In Panel B, significant effects are evident only for collective
levies. Thus it seems clear that correlated policy or price shocks are not a significant source of
bias.
6.3
Alternate specifications
The next specification check re-estimates the primary equation allowing for a number of additional controls. First, I re-estimate the primary specification controlling for lags and leads
of the market price and allowing the effect of the market price to vary across different quantiles of total temperature. While the quota price measure P is uncorrelated with the market
price by construction, it may be correlated with lags or leads of the market price.15 Denoting
14
For agricultural prices, it is only a subset of the total sample that reports market sales for a given crop,
accounting for a lower (and fluctuating) number of observations. There are also some missing observations for
policy outcomes, accounting for the lower number of observations.
15
Note the lags and leads of the market price refer to the year relative to the year in which quota income is
measured. In the main specification, economic outcomes are regressed on quota income from the previous year.
The lagged market price is thus the market price two years prior to the measurement of economic outcomes; the
leading market price is the market price in the same year that economic outcomes are measured.
18
temperature quantile dummies as q , I estimate the following equations:

m
Xivpt = Iivp,t1 + vp + pt + q Pvp,t2
+ ivpt
Xivpt = Iivp,t1 + vp + pt + q
m
Pvp,t
+ ivpt
(18)
(19)
The results are shown in Panels A and B of Table 7, and are consistent with the primary
results; again, there is a decline in agricultural production and investment and an increase in
consumption and borrowing.
Next, I add distinct time trends in each of the four quantiles of total temperature, denoted
q t . If the results in fact reflect differing trends over time in areas with different climatic
conditions, then adding these trends should render the relationship between quota income and
economic outcomes insignificant.
Xivpt = Iivp,t1 + vp + pt + q t + ivpt
(20)
The results are shown in Panel C of Table 7 and show coefficients that are consistent in both
magnitude and pattern of significance with the primary results.
As previously outlined, another potential challenge is that the climatic measure of interest
might be correlated with relative industrialization. Though insignificant, there is a positive
correlation between temperature and industrial employment that could be a source of bias. In
order to test this hypothesis, the equation is re-estimated with a different set of time trends for
each quartile of a measure of industrial employment Ivp , mean days worked in non-household
enterprises in the village. ind denotes dummy variables for quartiles of industrial employment,
yielding the following specification.
Xivpt = Iivp,t1 + vp + pt + ind t + ivpt
(21)
The results in Panel D of Table 7 are again consistent with the previous conclusions and show
no evidence that differential trends among villages with different levels of industrialization are
driving the results.
6.4
Determination of quota quantity and quota enforcement
Another potential source of bias in these results could be strategic behavior by households
around the quota quantity. If the determination of the quota quantity is responsive to household
behavior, then households facing variation in the quota price may manipulate their consumption
or investment decisions in an attempt to lower or increase their quota. If their incentives to do
so vary across areas with different climatic conditions, then the observed patterns could simply
reflect households efforts to manipulate the quota target.
In order to test this hypothesis, I regress lagged economic outcomes, employing the same
summary measures previously employed, on quota quantity and the interaction of quota quantity
19
with temperature, as well as household fixed effects ivp and province-year fixed effects.
Xivp,t1 = 1 Qivpt + 2 Qivpt T empvp + ivp + pt + ivpt
(22)
The objective is to test whether households economic decisions in a year seem to determine
the quota quantity they face in a subsequent year, and if this relationship varies systematically
across areas with varying temperature.
The results are shown in Table 8. The estimated coefficients are generally insignificant and
2 is uniformly so, with the exception of a positive coefficient when non-grain consumption is
the dependent variable. The results from this regression suggest, perhaps surprisingly, that
households with higher non-staple consumption may actually face lower quota quantities. However, this effect is not evident in high-temperature areas. Given that on average the quota price
remains below the market price in all years, households in low-temperature areas may have
an incentive to raise their consumption to lower their quota quantity, but this would generate
bias in the opposite direction of the observed effect: households in lower temperature areas,
generally characterized by lower quota income, would show higher consumption.
An additional source of bias could arise if quota enforcement differs systematically across
areas with different climatic conditions. In that case, quota income could itself endogenously reflect other political conditions, and this could be a source of bias if trends in political conditions
are correlated with quota prices. Unfortunately, enforcement cannot be measured contemporaneously in the primary dataset, as households do not separately report the quota quantity
assigned and the quota quantity sold. However, some data is available that can shed some light
on variable quota enforcement and resources for quota enforcement.
First, the household surveys report whether households include a member who is a government employee, a village cadre, or a party member. I can test whether quota quantity is
significantly correlated with these measures of political influence, and if the correlation varies
across villages with different climatic conditions by estimating the following equation, where
Xivpt denotes characteristics of the household.
Qivpt = 1 Xivpt + 2 Xivpt T empvp + vp + pt + ivp + ivpt
(23)
In addition, I employ data from a separate survey of village leaders that reports the quantity of
quota grain delivered relative to the amount contracted in the years 1990 and 1991, as well as
the number of public officials in the village (a rough measure of enforcement capacity) reported
in six different years. I regress these measures on temperature, conditional on year fixed effects.
Table 9 reports the coefficients of interest. While there is some evidence of favoritism in the
quota quantity system for government employees (though interestingly, not for village cadres or
party members), the degree of favoritism does not vary with climatic conditions. There is no
evidence in variation in village personnel who might participate in quota enforcement, or in the
actual proportion of contracted quantity delivered early in the 1990s. As previously mentioned,
the quota enforcement system seems robust enough to ensure that more than 95% of quota
20
grain contracted is in fact delivered.
Conclusion
The vast majority of the population of most developing countries in the world continues to
live in rural areas. Accordingly, understanding the implications of increases in income for
the economic activities of rural households is crucial in understanding how rural growth will
affect overall growth in developing countries, and particularly the shifts in investment between
agricultural and non-agricultural activities.
This paper analyzes the evolution of an unusual institution in rural China, the grain quota
system, to estimate the impact of a large income shock on household economic behavior. This
system effectively imposed a lump-sum tax on rural households that declined in magnitude over
time as the quota price increased, and also varied systematically cross-sectionally in correlation
with crop composition. The identification strategy exploits cross-sectional variation in the
climatic suitability of different areas for different crops in conjunction with time variation in
the quota price to generate a source of quasi-exogenous variation in quota income.
The results indicate that the effect of a positive income shock on investment in agriculture is strongly negative, while there are positive effects on industrial investment, employment
in state-owned enterprises, consumption of non-staple goods, and borrowing. Richer households therefore seek to reduce their investment in agriculture and diversify into other sectors,
particularly industrial sectors. This is a necessary condition, though not sufficient, for an increase in income for primarily rural and agricultural households to increased investment in
non-agricultural sectors. .
21
Figures and Tables

Figure 1: Quota production and total production
Figure 2: Quota and market prices over time

(a)
(b)
22
Figure 3: Pre-trends prior to quota price increase

(a) Agri. area sown
(b) Agricultural inputs
(c) Non-agricultural labor
(d) Migration
(e) Grain consumption
23
Table 1: Summary statistics

Variable
Mean
Standard deviation
Obs.
Household size
Sown area
Grain sown area
Productive assets
Non agri. business
Outside labor
Net income
4.086
1.418
1.253
.905
.328
.532
6669.1
1.441
.927
.817
.294
.529
.499
88.115
16553
16435
16482
16570
16570
16570
16332
Table 2: Variation in quota quantity and price

Quota quan.
(1)
Quota price
(2)
(3)
(4)
Temperature
Mean
Obs.
R2
Fixed effects
Clustering
52153
.313
Village
None
52153
.017
Year
None
40557
.002
Village
None
40557
.491
Year
None
Rice area
(5)
Quota quan.
(6)
.111
(.054)
150.176
(71.338)
.351
35577
.019
Prov.-year
County
321.825
35986
.008
Prov.-year
County
Notes: The regressions in columns (1) through (4) include only the specified set of fixed effects. The independent variable
in columns (5) and (6) is the mean total summed temperature for all days above 10 degrees Centigrade, normalized to
have mean zero and standard deviation one. The fixed effects employed and the clustering of standard errors are as
specified in the table. Asterisks indicate significance at the ten, five and one percent level respectively.
24
Table 3: First stage and specification checks

First stage
Quota income
(1)
(2)
Price x Temp.
Quota quan.
(3)
(4)
29.347
31.069
(6.106) (8.304)
.001
(.001)
Quota Price
Clustering
Sample selected
Price
(8)
Quan. rice res.

(9)
.006
(.004)
93.043
(91.169)
.002
(.001)
Temperature
Mean
St. dev.
Obs.
F
Fixed effects
Specification checks
Infra. dummy
Quan. res.
(5)
(6)
(7)
-13.291
(18.870)
2.464
30.855
(7.562) (9.668)
193.819
184.376 339.469 298.706
234.157
226.837 725.109 827.111
32167
19118
23004
17553
22.915
13.856
.106
10.114
Village + Prov.-year
Village
Vill.-year
Full
Hom.
Vill.-year
Hom.
Het.
.016
.126
21621
.86
Prov.-year
County
Hom.
.016
0
-.001
.126
639.055
.229
21621
21621
21621
1.57
.488
1.708
Vill.
Prov.-year Prov.-year
+ Prov.-year
Vill.-year
County
County
Hom.
Hom.
Hom.
3.698
497.183
21465
1.024
Prov.-year
County
Hom.
Notes: The independent variables are temperature, quota price and the interaction between the two, normalized to have
mean zero and standard deviation one. The dependent variable is quota quantity in Columns (1) and (2); a dummy for
whether household quota sales is equal to total production in Columns (3) and (4); the residual of quota quantity
regressed on village fixed effects in Column (5); quota price in Column (6); the residual of quota quantity regressed on
rice area cultivated in Column (7); and quota income in Column (8). Hom. denotes villages that are homogeneous in
rice and wheat production, while Het. denotes villages that are heterogeneous. The fixed effects employed and the
clustering of standard errors are as specified in the table. Asterisks indicate significance at the ten, five and one percent
level respectively.
25
Table 4: Primary results

Agri.prod. Agri. input Non agri. Outside labor Migration Grain cons. Other cons. Borrowing
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Panel A: Quota quantity and differential trends

Quota quantity 1993
Obs.
.747
(.159)
.580
(.100)
.095
(.045)
.017
(.033)
.254
(.056)
.309
(.072)
.060
(.016)
.015
(.053)
15556
15556
15556
15556
15556
15556
15556
15556
Panel B: Ordinary least squares

Quota income
Obs.
.470
(.029)
.306
(.022)
.0006
(.022)
.050
(.013)
.160
(.016)
.177
(.014)
.050
(.005)
.006
(.006)
16570
16570
16570
16570
16570
16570
16570
16570
Panel C: Two-stage least squares

Quota income
Obs.
-.459
(.265)
-.402
(.213)
.052
(.243)
.190
(.227)
.073
(.184)
.073
(.133)
.197
(.068)
.167
(.089)
16570
16570
16570
16570
16570
16570
16570
16570
Notes: All specifications include village and province-year fixed effects, and standard errors clustered at the village-year
level. The independent variable in Panel A is quota quantity in 1993; the independent variable in Panels B and C is
quota income, lagged, in hundreds of yuan. Summary measures employed as dependent variables are calculated as follows
and then standardized to have mean zero and standard deviation one. The summary measures for agricultural
production, agricultural inputs and non-agricultural labor represent the mean of all variables reported in Panels A, B and
C respectively of Table 5. Outside labor is the mean of Panel D, Columns (1) through (4); migration is the mean of Panel
D, Columns (5) through (8). Grain consumption is simply grain consumption as reported in Table 5, Panel E, Column
(1); non-grain consumption is the mean of the other variables in Table 5, Panel E. The summary measure for borrowing is
simply the variable for whether a household has obtained a loan. Asterisks indicate significance at the ten, five and one
percent level respectively.
26
Table 5: Two-stage least squares

Panel A: Agriculture
Quota income
Mean
Obs.
Sown area
(1)
Grain
(2)
Wheat
(3)
Rice
(4)
Cash
(5)
Grain prod.
(6)
Cotton prod.
(7)
-.763
(.439)
-.364
(.353)
-.019
(.036)
-.010
(.013)
-.365
(.153)
-90.293
(142.872)
-9.989
(5.551)
1.418
16435
1.253
16482
.416
16432
.204
16538
.977
16427
2255.035
16503
18.244
16569
Panel B: Agricultural inputs

Grain seeds Cash seeds Fertilizer
(1)
(2)
(3)
Quota income
17.470
Obs.
Assets
(4)
Animals
(5)
Tools
(6)
Machinery
(7)
-5.092
(2.445)
.363
(.249)
-20.175
(34.056)
-.046
(.021)
-.071
(.048)
-.044
(.029)
-.036
(.027)
.768
16325
573.532
16459
816.419
16428
.905
16570
.328
16570
.683
16570
16570
Panel C: Non-agricultural household activities
Quota income
Mean
Obs.
Labor
Indus.
(1)
Cons.
(2)
Trans.
(3)
Retail
(4)
Indus.
(5)
Investment
Cons.
(6)
Trans.
(7)
Retail
(8)
.039
(.020)
.005
(.014)
.011
(.016)
-.051
(.019)
.008
(.015)
.004
(.009)
.006
(.014)
-.029
(.017)
.080
16570
.050
16570
.075
16570
.123
16570
.069
16570
.027
16570
.047
16570
.095
16570
Panel D: Outside labor

Outside
(1)
Collective
(2)
SOE
(3)
Private
(4)
Outside
(5)
Outside
(6)
Household size
(7)
Remittances
(8)
Quota income
.053
(.048)
.016
(.037)
.041
(.018)
-.045
(.038)
.035
(.047)
.029
(.039)
-.075
(.063)
-7.063
(31.787)
Mean
Obs.
.532
16570
.184
16570
.062
16570
.177
16570
.333
16570
.193
16570
4.086
16553
95.555
16568
Panel E: Consumption
Grain
(1)
Veg.
(2)
Oil
(3)
Meat
(4)
Milk
(5)
Eggs
(6)
Sugar
(7)
Total non grain

(8)
Quota income
29.863
(38.281)
1.126
(1.132)
2.097
(1.286)
9.480
(3.405)
.088
(.073)
2.830
(1.004)
1.302
(.679)
16.585
(5.733)
Mean
Obs.
986.662
16511
24.376
16406
33.904
16570
57.660
16570
.179
16427
15.209
16345
8.036
16541
138.901
16570
level. The independent variable is quota income, lagged, in hundreds of yuan, instrumented by the interaction of the total
temperature index and the quota residual. Asterisks indicate significance at the ten, five and one percent level
respectively.
27
Table 6: Robustness checks: correlated shocks

Panel A: Agricultural prices
Sum. 1
(1)
Sum. 2
(2)
Rice
(3)
Wheat
(4)
Corn
(5)
Pork
(6)
Cotton
(7)
Soy
(8)
Veg.
(9)
Price temp int.
-.0004
(.022)
-.039
(.033)
-.012
(.021)
.023
(.029)
-.038
(.039)
-.059
(.034)
.102
(.053)
-.130
(.031)
-.002
(.007)
Obs.
11697
11586
1028
2527
5737
5240
3577
2554
2507
Panel B: Policy measures

Summary
(1)
Cadre
(2)
Party
(3)
State inputs
(4)
Taxes
(5)
Coll. levies
(6)
Fees
(7)
Fines
(8)
Price temp int.
-.004
(.012)
.003
(.011)
-.004
(.006)
.009
(.006)
-.017
(.039)
.055
(.015)
-.023
(.034)
-.068
(.065)
Obs.
13153
13130
13149
13153
12943
13067
12984
13010
level. The dependent variables (prices and policy measures) are normalized to have mean zero and standard deviation
one. The independent variable is the primary instrument of interest, the interaction of the total temperature index and
the quota residual. Asterisks indicate significance at the ten, five and one percent level respectively.
28
Table 7: Robustness checks: alternate specifications

Agri. prod.
(1)
Agri. input
(2)
Non agri.
(3)
Outside labor
(4)
Migration
(5)
Grain cons.
(6)
Other cons.
(7)
Borrowing
(8)
Panel A: Summary measures with controls for lagged market price

Quota income
Obs.
-.507
(.285)
-.440
(.231)
.045
(.273)
.190
(.243)
.139
(.208)
.130
(.154)
.218
(.074)
.189
(.100)
16125
16125
16125
16125
16125
16125
16125
16125
Panel B: Summary measures with controls for leading market price

Quota income
Obs.
-.465
(.274)
-.371
(.210)
.039
(.257)
.155
(.239)
.070
(.194)
.064
(.142)
.205
(.071)
.197
(.101)
16158
16158
16158
16158
16158
16158
16158
16158
Panel C: Trends by quartile of temperature

Quota income
Obs.
-.417
(.185)
-.255
(.152)
.248
(.209)
.065
(.164)
-.090
(.142)
-.115
(.099)
.151
(.047)
.161
(.067)
16570
16570
16570
16570
16570
16570
16570
16570
Panel D: Trends by quartile of industrial employment

Quota income
-.432
(.265)
-.441
(.257)
.023
(.275)
.409
(.275)
.176
(.220)
.106
(.152)
.236
(.092)
.177
(.098)
Obs.
16570
16570
16570
16570
16570
16570
16570
16570
level. The independent variable is quota income, lagged, in hundreds of yuan, instrumented by the interaction of the total
temperature index and the quota residual. Results in Panels A and B include a control for the lagged or leading market
price, respectively, interacted with quantiles of total temperature; Panels C and D include separate time trends for each
quartile of total temperature and separate time trends for each quartile of industrial employment, respectively. The
dependent variables are summary indices with mean zero and standard deviation one; definitions of the indices are
provided in the notes to Table 4. Asterisks indicate significance at the ten, five and one percent level respectively.
Table 8: Endogenous determination of quota quantity
Quota quantity
Quota quantity int.
Obs.
Lagged
agri. prod.
(1)
Lagged
agri. input
(2)
Lagged
non agri.
(3)
Lagged
outside labor
(4)
Lagged
migration
(5)
Lagged
grain cons.
(6)
Lagged
other cons.
(7)
Lagged
borrowing
(8)
.117
(.185)
.071
(.202)
-.092
(.169)
.108
(.159)
.065
(.132)
-.137
(.131)
-.224
(.120)
.082
(.113)
-.238
(.121)
.157
(.117)
.010
(.153)
.056
(.134)
-.086
(.041)
.124
(.044)
-.274
(.263)
.163
(.244)
16306
16306
16306
16306
16306
16306
16306
16306
level. The dependent variables are lagged summary indices with mean zero and standard deviation one; definitions of the
indices are provided in the notes to Table 4. The independent variables are quota quantity and the interaction of quota
quantity with the total temperature index, both standardized to have mean zero and standard deviation one. Asterisks
indicate significance at the ten, five and one percent level respectively.
29
Table 9: Variation in quota enforcement

Quota quantity
(1)
-46.726
(5.969)
Government employee int.
1.615
(5.506)
Cadre
(2)
(3)
Party
Village
Economic Cadres Quota fulfillment
committee committee committee
(4)
(5)
(6)
(7)
(8)
Government employee
Cadre int.
Party member
Party member int.
5.207
(7.566)
-9.501
(8.377)
.455
(5.716)
-4.833
(7.816)
Temperature
Mean
Obs.
Fixed effects
Clustering
226.357 226.357 226.357

14314
14334
14338
Village + prov.-year
Village-year
.107
(.156)
.144
(.140)
.572
(1.634)
-.166
(.312)
-.006
(.013)
3.922
185
Year
Village
4.897
185
Year
Village
4.034
185
Year
Village
6.869
319
Year
Village
.955
126
Year
Village
Notes: The dependent variable in Columns (1) through (3) is quota quantity; the independent variable is the specified
household characteristic, and the same characteristic interacted with temperature. The dependent variable in Columns
(4) through (7) is the number of members in the specified committee in the village or the number of village cadres, and in
Column (8) is the proportion of quota quantity contracted that is delivered; the independent variable is the total
temperature index, normalized to have mean zero and standard deviation one. Fixed effects and clustering in each
specification are as specified. Asterisks indicate significance at the ten, five and one percent level respectively.
30
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33

Leight Grain Into Gold Cornell

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Grain into gold?

The impact of agricultural income shocks on

Preliminary and not for citation. Email: jessica.leight@williams.edu

an attempt at liberalization of sales is followed by inflation or declining supplies and then a

in response to declining production and an increased emphasis on grain self-sufficiency at the

The residual from this regression is denoted Pvpt .

Variation in crops and quota quantity

partially determined by temperature: more specifically, the total accumulated temperature

Qivpt = T empvp + pt + ivpt

A one-standard deviation increase in the interacted instrument leads to an increase in quota

conditional on cross-sectional fixed effects, in homogeneous and heterogeneous villages.

Civpt = T empvp + pt + ivpt

Civpt = T empvp Pvpt + vp + pt + ivpt

Pvt = T empvp + pt + ivpt

Ordinary least squares

and province-year fixed effects.

Two-stage least squares

implying an increase in quota income of around 80 yuan, or a proportionate increase of 40%.

Shocks correlated with quota price

temperature quantile dummies as q , I estimate the following equations:

Determination of quota quantity and quota enforcement

grain contracted is in fact delivered.

Figures and Tables

Figure 2: Quota and market prices over time

Figure 3: Pre-trends prior to quota price increase

(b) Agricultural inputs

(c) Non-agricultural labor

(e) Grain consumption

Table 1: Summary statistics

Table 2: Variation in quota quantity and price

Table 3: First stage and specification checks

Quan. rice res.

Table 4: Primary results

Panel A: Quota quantity and differential trends

Panel B: Ordinary least squares

Panel C: Two-stage least squares

Table 5: Two-stage least squares

Panel B: Agricultural inputs

Panel C: Non-agricultural household activities

Panel D: Outside labor

Total non grain

Table 6: Robustness checks: correlated shocks

Price temp int.

Panel B: Policy measures

Price temp int.

Table 7: Robustness checks: alternate specifications

Panel A: Summary measures with controls for lagged market price

Panel B: Summary measures with controls for leading market price

Panel C: Trends by quartile of temperature

Panel D: Trends by quartile of industrial employment

Table 8: Endogenous determination of quota quantity

Table 9: Variation in quota enforcement

226.357 226.357 226.357

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Qivpt = T empvp + pt + ivpt

Civpt = T empvp + pt + ivpt

Civpt = T empvp Pvpt + vp + pt + ivpt

Pvt = T empvp + pt + ivpt