[8]. JCRR, "Annual Reports," p. 33. As of June 30, 1951, 184 cases were listed under "To Be Settled." It is impossible to determine the exact number of illegal compensating payments which occurred. Divergences exist in different sources. Closer inspection, however, reveals that their differences are largely superficial. They differ in their criteria of counting: one source counts all clerical errors in lease contracts as illegal; another disregards them as immaterial. The cases cited above were those in which compensating payments had actually occurred. The greatest difference is seen in comparing JCRR, "Annual Reports," p. 33, and TPLB, "Implementation," pp. 24-25, table 5. In the latter, illegal practices (including tenure rearrangements) amounted to 41,994 cases (the highest number on record), but over 80 percent of these cases were due to improper wordings or signatures used in the contracts. Furthermore, if several errors were found in one contract, all were counted. These clerical errors are understandable because most of the tenants were illiterates and were prone to make errors on the written contracts now officially required. The JCRR, on the other hand, did not consider these as substantial and disregarded them.
[9]. Chen, Records, p. 30.
[10]. See ibid., and JCRR, "Annual Reports," pp. 29, 32, table 6.
[11]. JCRR, "Annual Reports," p. 32, table 6. Some of these granted cases were a result of official errors (ibid., p. 28).
[12]. Ibid. The total area of private land amounted to 672,360 hectares. Before the share restriction, 56 percent of these were under tenancy. See chapter 7 of this study.
[13]. TPLB, "Implementation," pp. 24-25, table 5.
[14]. See Chen, Records, p. 41; and JCRR, "Annual Reports," p. 27.
[15]. See Cheng Chen, An Approach to China's Land Reform (Taipei: Cheng Chung Book Co., 1951), p. 24.
6.Allocation Effects of Rental Share Restriction: The Hypothesis of Increased Farming Intensity
In the preceding chapter we concluded that offsetting contractual rearrangements through which the initially contracted resource allocation and income distribution may be restored occurred only sparingly in Taiwan after the rental percentage reduction in 1949. One explanation is the comprehensive legal restrictions and enforcement of law. Another explanation, which will be explored in this chapter, is an associated increase in output under the share restriction which partially compensates the landowner for reduced income from land. In practice, the landowner may be compensated both by an illegal compensating payment and by an increase in output.
As we derive here the hypothesis of increased farming intensity, for analytical convenience let us suppose that under the reduction of the permissible rental percentage, no illegal compensating payment is made. The implications of this hypothesis can be summarized. Under the share restriction, nonland resources will be directed to tenant farms from all other uses. The marginal product of land in these farms will then be higher, and the marginal products of tenant inputs will be lower, than those of similar resources employed elsewhere. In other words, the marginal products of tenant inputs will be lower than the associated marginal opportunity cost.
Suppose the market (unrestricted) rental percentage of 70 percent (r=0.7) is restricted by regulation to 40 percent (
= 0.4). The landowner now in the true sense receives 40 percent, r, of the annual yield with no other form of compensation. The tenant is thus getting from the total annual product twice his initial share of 30 percent. Will an existing tenant, therefore, offer to commit more farming inputs? And if so, will this lead to more efficient resource use?
The unrestricted market rental percentage, recall, is reached when the marginal tenant (nonland) cost of farming equals the marginal product of tenant (nonland) input. Thus, any further increase in nonland farming input will not pay the tenant. To illustrate, suppose, with the restricted
= 0.4, the tenant commits an additional 10 of farming input, the corresponding gain in product will be less than 10. Therefore, the tenant will receive an additional income of less than 6 with the reduced rental percentage (which is obtained by using the amount of less than 10 times 1 —
). Indeed, the tenant would not voluntarily offer to commit additional farming input to the area of land he already is using even if the land were given to him.
By the same reasoning, the landowner will not commit more farming input himself a fortiori. Under the share restriction (constraint), however, competition will require the tenant to do so. For example, suppose before the restriction the total yield is 200, and with r — 0.7 the tenant's income is 60, an amount which equals his alternative earning. With the imposition of
= 0.4, the current tenant will receive 120, or 60 over his alternative earning. This tenant, in order to keep or get land will offer to commit an additional farming cost of at least 60. To illustrate, suppose the tenant agrees to commit an additional nonland farming cost of 60, the amount over his alternative earning resulting from the share restriction. The corresponding value of marginal product will be less than 60 —say 40. Of this 40 the owner will receive 40 ×
, or 16, and the tenant will receive 40 × (1 -
), or 24. To the tenant, this 24 is an amount over his alternative earning, which the owner can again induce the tenant to invest in farming.
