A Principal-Agent Analysis Of The Conversion Of Farmland To Forests

The project of conversion of farmland to forests is one of the major strategic initiatives aimed at solving serious ecological deterioration such as soil erosion and land desertification in our country. It is also one of the important components in the Great Western Development. Different from other ecological projects, the conversion of farmland to forests is based on the contract of use changes of peasants'land between governments and peasants. In that case, peasants are probably inclined to act opportunistically on the condition of asymmetric information, which violates the policy of the conversion of farmland to forests, and definitely weakens the performance of the project. Therefore, it is very necessary to design and improve this new contract to give peasant agents more incentives to work for principals'interest, and inhibit them from committing moral hazard. The paper analyzes from a principal-agent angle interest relations and corresponding strategy choices between the central government, local governments and peasants, in order that incentive compatibility mechanism of the conversion of farmland to forests will be theoretically formed, that persistence and stability of returning of farmland to forests will be guaranteed, and that unity of ecological benefits, economic benefits and social benefits will be realized.First, the paper generally introduces the main problems, current implementation and research situation at home and abroad, research methods and initiative points. Then it theoretically discusses the reasons that peasant agents are given compensation incentives in the conversion of farmland to forests. Here it draws a conclusion that the market mechanism fails to allocate forestry products effectively, and then tries to offer the ways of internalization of externalities. Next using game approaches, the paper analyzes action strategies between the three interest bodies mentioned above, and the establishment, structure and operating situation of principal-agent relations between the central government, local governments and peasants. As a result of multiple principal-agent relations, there is not only agency risk of peasants, but also double risks from local governments, which are agents as well as principals. Especially, peasant agents will commit opportunist action according to market changes, which probably causes conflict between private rationality and social rationality, and undoubtedly damages real efficiency of the project. As the project mainly involves use changes of peasants'land, the paper compares the two types of contracts in household operating responsibility system of contractor and conversion of farmland to forests. Through the principal-agent models, it proves that there are efficient differences between the two contracts. Based on them, the paper identifies the reasons why the project of returning farmland to forests lacks efficiency. In the end, it empirically verifies the previous theoretical analysis by checking the situation of returning farmland to forests in Shaanxi Province, and then provides some suggestions about how to improve compensation policies in the conversion of farmland to forests.As the central government, local governments and peasants in the conversion of farmland to forests are three interest bodies whose objectives are all utility maximization, common asymmetric information tends to cause nonideal game equilibrium when they are making their decisions. Especially peasants'rational choices will weaken incentives of compensation policy, and spur peasants to break land contracts with governments in order to maximize their utility. To restrain this kind of opportunist marketing action in accord with peasants'economic rationality, their present and long-term interest aspiration should be considered fully, that is, to fully consider peasants'participation constraints and incentive compatibility constraints. To change its backward modes of production and to improve its economic structure are key to effectively restrain peasants'opportunist marketing action, and also the fundamental way to strengthen sustainable development capacity in the areas of returning farmland to forests. On the other hand, peasants'risk attitude have a significant impact on executive efficiency of land contract. Since there are some differences in risk expectation between two types of land contract, executive efficiency of household operating responsibility system of contractor is higher than that of the conversion of farmland to forests. For this, to change peasants'risk attitude or expectation will have practical significance for improving some public compensation policies and executive efficiency of returning cropland to forests.