Refining the Rent Dissipation Model in Land Use: Application to Agricultural Insurance in China
Round 1
Reviewer 1 Report
Dear Authors,
My sincere apologies for the delayed review of your paper.
Your Abstract is somehow misleading in the fragment just after the sentence, "Hendren, Sprung-Keyser(2020)’s MVPF measure is also calculated to provide additional evidence for our theory" There is another sentence explaining their work or is it related to your work? Exactly the sentence: "It concludes that identifying potential informal risk-bearing arrangement and combining it with formal insurance will be helpful to reduce social cost behind increasing rent pattern, thus increase in house landlord’s welfare per se".
Can you please consider better abstract for your paper?
Line 26 I think it should be: "Gordon's analysis (1954) of fishery grounds [1]." - please consider the edition of the very first sentence to achieve clarity in your work;
Line 38 - similar problem;
Line 40 - incorrect citation [2] placement;
I strongly advise putting the sentences from the footnotes into the main text, or if they are irrelevant, just delete them, please;
Footnote no. 3 is repeated in line 160.
There are other minor editing problems when you put the citations/ references after the dot (end of the sentence). There are simple mistakes which raise more questions than provide answers - why in Table 1 is there 22004 year?
Did you read your paper before submission? There are some writing errors (Figure 3 "Susidized");
Symbols in Figure 1 were not fully explained; is W a wage?
How exactly Figure 1 Gordon's Solution is related to Figure 2
Where are the data which allowed you to draw the plot in Figure 3?
Table 3 is irrelevant when there is no formula for calculating MVFP and Efficiency. Moreover, the efficiency is negative in most cases of the China regions (or major cities?).
What is the practical implication of your paper? What is your contribution to the theory?
Please think about the reproducibility of your paper; in my opinion, this paper does not provide any secondary data or formulas to replicate your calculations and achieve similar results;
Author Response
Comment 1: Your Abstract is somehow misleading in the fragment just after the sentence, "Hendren, Sprung-Keyser (2020)’s MVPF measure is also calculated to provide additional evidence for our theory" There is another sentence explaining their work or is it related to your work? Exactly the sentence: "It concludes that identifying potential informal risk-bearing arrangement and combining it with formal insurance will be helpful to reduce social cost behind increasing rent pattern, thus increase in house landlord’s welfare per se". Can you please consider better abstract for your paper?
Reply 1: We are sorry for the confusion in the abstract. This part has been rewritten as follows:
The gap between positive prospects of subsidized agricultural insurance and public financial burden poses a question of efficiency in heavy-subsidized risk management tool in land use. Rent dissipation model in land use are refined to derive overpricing hypothesis: If a risk-relevant service behaves as if unexhausted, then insurance suppliers will have incentives to squeeze in: insurance agent can exaggerate production scale or unit of absent landlord, or exaggerate the extent of availability when adverse events happen to tilled land. Whatever the margin of behavior transformation is, an increasing rent rather than rent dissipation (or equally, overpricing pattern) will be observed in both premium and indemnity series. Marginal Value of Public Funds (MVPF) measure is also calculated to provide additional evidence for our theory. We conclude that identifying potential informal risk-bearing arrangement and combine it with formal insurance will be helpful to reduce social cost behind overpri1cing behavior and increase in-house landlord’s welfare per se, thus alleviate the gap between positive prospects of subsidized agricultural insurance and public financial burden.
Comment 2: Line 26 I think it should be: "Gordon's analysis (1954) of fishery grounds [1]." - please consider the edition of the very first sentence to achieve clarity in your work; Line 38 - similar problem; Line 40 - incorrect citation [2] placement;
Reply 2: These two advices have been taken and relevant citations has been re-placed.
Comment 3: I strongly advise putting the sentences from the footnotes into the main text, or if they are irrelevant, just delete them, please; Footnote no. 3 is repeated in line 160.
Reply 3: We appreciate the reviewer’s careful reading. The content contained in Footnote 3 has been moved into main text. However, we insist that footnotes is useful on the base that they can provide some background or institutional information that help scholars abroad understand what’s going on in rural China.
Comment 4: There are other minor editing problems when you put the citations/ references after the dot (end of the sentence). There are simple mistakes which raise more questions than provide answers - why in Table 1 is there 22004 year? Did you read your paper before submission? There are some writing errors (Figure 3 "Susidized");
Reply 4: All other citations/ references have been checked and relevant mistake corrected. We feel sorry for the typing errors mentioned (such as “22004 year” in Table 1 and “susidized” in Figure 3), and will make sure that the same mistakes will be avoided in revised manuscript.
Comment 5: Symbols in Figure 1 were not fully explained; is W a wage? How exactly Figure 1 Gordon's Solution is related to Figure 2
Reply 5: We have added illustrations explaining symbols used in Figure 1. W is exactly wage of fishing labor, as is in Gordon (1954) and Cheung (1970).
Figure 1 compare two models of rent dissipation in land use of optimal fishing: biologist’s view as demonstrated by Gordon (1954), and economist’s view by Cheung (1970). Gordon errs in the sense of ignoring the basic production law of decreasing marginal return, while Cheung misses the mark when taking into account both decreasing marginal product and rent dissipation constraints (see the first paragraph of the introduction part, and the last paragraph of Section 4.1). So, it’s natural to construct a new model of land use that can not only absorb the rent seeking behavior from classical rent dissipation models, but also incorporate new implications concerning potential increasing rent pattern in real world. That is, Figure 2 extend Cheung solution in Figure 1 to Increasing rent in Figure 2 by bringing in transaction costs as costs rather than rent dissipation.
Comment 6: Where are the data which allowed you to draw the plot in Figure 3?
Reply 6: Actually, we have mentioned the data source in Footnote 7 of the original manuscript, which is moved into main text of Section 3. Anyway, we will put all data online after the paper is accepted, then scholars all round the world can easily reproduce the results we found in this paper, especially the remarkable increasing rent pattern shown in Table2-3.
Comment 7: Table 3 is irrelevant when there is no formula for calculating MVFP and Efficiency. Moreover, the efficiency is negative in most cases of the China regions (or major cities?).
Reply 7: We have added formula (1) for calculating MVFP in revision. The negative figures is demonstration of overpricing hypothesis rather than refutation, thus is exactly favorable.
Comment 8: What is the practical implication of your paper? What is your contribution to the theory?
Reply 8: The practical implication is that over-pricing hypothesis is well-founded and relevant, thus contributing rent dissipation model of land use in theory. The empirical findings, confirming our theory on one hand, has also established low efficiency as to public funds in subsidizing agricultural insurance, thus shed some lights on how to reform this formal risk-bearing arrangement in the line of transaction costs economics.
Comment 9: Please think about the reproducibility of your paper; in my opinion, this paper does not provide any secondary data or formulas to replicate your calculations and achieve similar results.
Reply 9: The reproducibility is recognized as basic goal in our work. Here we offer two solutions to the issue raised. Firstly, we will upload all original data online after our paper is accepted. Surely, if the reader/reviewer is familiar with Chinese yearbook, he/she can easily reproduce the findings in table 2 and 3. Actually we have already stated clear that in “Data Availability Statement” part of our manuscript. Secondly, we will offer stronger statistical evidence in support of overpricing hypothesis using Mann-Whitney U test, as shown in Table A1-A2.
Author Response File: 
Author Response.pdf
Reviewer 2 Report
Please find below some comments that will improve the quality of your work:
The introduction introduces the topic to the reader and the aim of this work is fairly explained; however the rationale for this study could be more directly presented.
Please check the format of page 1.
Please ensure the citations and references are in the appropriate format as there are some issues.
You manage to present relevant information that allow you to shape the hypotheses of your work.
In the literature you provide, you could be more critical evaluating the methods employed in the studies and where differences may lie. What other authors have found on the topic and how your work will contribute to the sector?
In the materials and method section, you need to thoroughly provide information about the secondary data used, the data frequency, type of data – time series, what they represent etc.
In addition, you have to explain and justify in a more complete way why t-test is the appropriate to be applied in your case and show studies on the topic that have actually employed that.
Also, what are the disadvantages associated to the methods used? Have you employed a normality test before selecting the specific technique?
In table 1 please make sure you correct the date 2004 which is shown as 2204
Please read again and rephrase where needed the lines 306-309.
Note 20 in page 14 could be reduced.
In the discussion part you do provide an explanation to your findings and you discuss with literature. However, you could compare and contrast more the findings of your work to other studies .
Conclusion presents the main highlights of the work and recommendations are provided. However, the limitations of this work have to be acknowledged and further research to be proposed.
Author Response
Comment 1: Please check the format of page 1.
Reply 1: The format of page 1 has been adjusted.
Comment 2: Please ensure the citations and references are in the appropriate format as there are some issues.
Reply 2: The citations and references has been checked and all references are in the appropriate format.
Comment 3: You manage to present relevant information that allow you to shape the hypotheses of your work. In the literature you provide, you could be more critical evaluating the methods employed in the studies and where differences may lie. What other authors have found on the topic and how your work will contribute to the sector?
Reply 3: Thanks for the nice suggestions! We have tabulated relevant information related to several research on agricultural insurance: method employed, main findings and potential pitfalls. Actually, our paper contributes equally to economic theory and policy practice. As to the former, traditional analyses on rent dissipation model of land use is compared (that is, Gordon solution versus Cheung solution), with their logical pitfalls specified. Bringing in another kind of transaction costs other than rent dissipation, we are led to over-pricing hypothesis that implies certain increasing rent pattern. Needless to say, the deduction process is natural and clear, so we let go another table concerning theoretical rent dissipation models.
Comment 4: In the materials and method section, you need to thoroughly provide information about the secondary data used, the data frequency, type of data – time series, what they represent etc.
Reply 4: We have move relevant information from footnote to the main text concerning the source of secondary data, data frequency, data type and necessary statement to clarify materials used to test our theory.
Comment 5: In addition, you have to explain and justify in a more complete way why t-test is the appropriate to be applied in your case and show studies on the topic that have actually employed that.
Reply 5: “t” test is widely used in research concerning comparing difference in paired series. It is a simple tool with marvelous power, and championed by leading economist. Using the same method as in this paper, Cheung demonstrates the “increasing intensity of labor” implication of his rent dissipation model.
“A ‘t’test was run on the observations of plant yields before and after the share restriction, by using the standardized mean difference of twenty-three paired observations in Table 8. The null hypothesis, that there was no systematic and significant difference between the before and after plant yields, was rejected at the α=0.01 level of significance. The plant yields for horticulture under the share restriction were significantly lower.” See Cheung (1969), especially Footnote 46 in page 154 of Section D “Crops Unaffected by the Share Restriction: Horticulture” in Chapter 8 “Patterns of Crop Choice, Hectare Yields and Marginal Productivities Implied by Increasing Farming Intensity”
In another famous investigation， John Umbeck also applied “t” test to compare work requirements between Tuolumne County and other mining camps, signaling different enforcing costs according to his theory of property right:
“Out of 106 contracts governing behavior in the placer districts, 62 stipulated that a miner represents his claim anywhere from 1 days out of every 3 days to 1 day out of every 6 months. Of the 17 tuolumne County districts, 16 had explicit work requirements averaging 45 days per 6 months, or 1 day out of every 7. The difference between these 2 means was found to be significant at the 0.01 level.” See Umbeck (1981), especially page 124 of Section “Work Requirement and Threat of Violence” in Chapter 9 “Violence and Restriction of Property Rights”
In this very chapter, Umbeck also tests the effect of cost of theft by t test:
“Because the costs of enforcing exclusive rights at the borders of quartz claims were lower than for placer claims, there was less to be gained from more frequent work requirements. Quartz claims should have had lower work requirements than placer claims. Table 9.3 summarizes the information contained in 74 quartz district contracts. The average amount of work required every 6 months was 8.7 days or about 1day out of every 21. The average for placer districts was 31.2 days per 6 months, or about 1day out of every 6. The difference between these averages was significant at the 0.01 level.”
In a journal article, Luo Biliang uses the same method to depict “relation-based” land-transferring: desired monetary rent in this kind of transaction is significantly lower than those between strangers. See Luo (2017), especially Table 2 in page 184. We will discuss this methodological issue further in next reply.
Comment 6: Also, what are the disadvantages associated to the methods used? Have you employed a normality test before selecting the specific technique?
Reply 6: As to disadvantages concerning t test, we have explained it briefly in revision. Its major pitfall lies in the non-parametric nature that exclude any parametric estimation on the identification of our rent dissipation model. On the other hand, this non-parametric nature can also provide workable identification in the sense of economic significance, thus is not absolutely detrimental.
Normality test is a standard treatment before conducting t test. Actually, we have also used Mann-Whitney technique that does not assume normality. The Mann-Whitney test on either series (that is, premium series or indemnity series) even shows a much stronger rent seeking pattern than t test. So even if normality test fails in 10 out 17 premium series giving α=0.05, the over-pricing pattern identified in table 2 and 3 still stands.
To put the methodological issue in different way, we put economic significance before statistical significance when testing our refined rent dissipation model. Heckman has also discussed this methodological paradigm intensively. In Heckman, Singer (2017), first empirical research cited as benchmark of empirical writings in economic science comes from Friedman (1957). Friedman’s classic even does not a p value throughout. However, combination of economic theory, econometric model and multi-source data makes it a legendary monograph on consumption theory.
Comment 7: In table 1 please make sure you correct the date 2004 which is shown as 2204
Reply 7: We have corrected this typing error.
Comment 8: Please read again and rephrase where needed the lines 306-309.
Reply 8: We have read and rephrased the content between line 306 to line 309.
Comment 9: Note 20 in page 14 could be reduced.
Reply 9: We have reduced this footnote and move relevant content into main text.
Comment 10: In the discussion part you do provide an explanation to your findings and you discuss with literature. However, you could compare and contrast more the findings of your work to other studies.
Reply 10: Nice suggestions. Here we return to the issue of test on rent dissipation models and push beyond methodological discussion further. The use of non-parametric econometrics is not only consistent with classic writing in Cheung (1969) and Umbeck (1981), it also contrasts significantly with Fudenberg, Tirole (1987)’s treatment on this issue using game theory.
Comment 11: Conclusion presents the main highlights of the work and recommendations are provided. However, the limitations of this work have to be acknowledged and further research to be proposed.
Reply 11: In the revision, we acknowledge several limitations. We propose two promising tasks in research agenda: the first concerns parametric identification of our rent dissipation model; the second concentrates on how to use informal risk bearing arrangements to complement subsidized agricultural insurance.
Author Response File: Author Response.pdf
Reviewer 3 Report
The paper shows a very interesting topic. Agricultural insurance in times of climate changes faces significant challenges. The most interesting from my perspective is the finding: Despite this, the central government establishes the cover ratio of insurance indexed to administrator’s appraisal. Facing both the official obligation and potential private interest (e.g., fraud), it is not surprising that some would illegally underwrite crops on the behalf of farmers who are unwilling to get involved. It would be interesting to know what is done to fight this phenomenon.
Author Response
Comment: The paper shows a very interesting topic. Agricultural insurance in times of climate changes faces significant challenges. The most interesting from my perspective is the finding: Despite this, the central government establishes the cover ratio of insurance indexed to administrator’s appraisal. Facing both the official obligation and potential private interest (e.g., fraud), it is not surprising that some would illegally underwrite crops on the behalf of farmers who are unwilling to get involved. It would be interesting to know what is done to fight this phenomenon.
Reply: We appreciate the reviewer’s endorsement and will do our best to satisfy high quality requirement of the journal.
Our interest in agricultural insurance originates from Halcraw’s Ph. D dissertation： “A Theory of Crop Insurance”. Halcraw, then as Ph. D candidate at University of Chicago, defended his thesis in 1948 under the supervision of Theodore Shultz and Gale Johnson. Reading his work in 2018, it occurred to Chao Hu (the first author of our paper) that he follows Pigovian tradition clearly. We guessed it is why Milton Friedman criticized the candidate’s theory before the committee. But then our ability in explaining pricing behavior by rent analysis is very limited. About one year later the first edition of our “Price Signal” paper appears. And we noticed that Joseph William Glauber, a specialist in this area posted a relevant draft on internet, namely “Rent Dissipation in the US Agricultural Insurance”. In this paper, Glauber and his co-authors argue that agricultural insurance business is very comparable to military industry where lobbies and rent seeking are remarkable. we were stroke by this point and began to link rent seeking behavior to Cheung (1970)’s rent dissipation model. By refining his model, frauds in promotion of agricultural insurance in China can be explained.
As to the rogue behavior of some Chinese governmental officials, till now we do not see any clear precaution to avoid such frauds. That is, the illegal actions in China can only be punished when discovered. Relevant institutional design is very poor. It seems that this issue has not raised enough concerns among both scholars and high-rank officials, which explains in turn why some are so keen to introduce index-based agricultural insurance products, leaving social cost implied unquestioned.
Author Response File: Author Response.pdf
Round 2
Reviewer 2 Report
Thank you very much for accounting for the comments I have provided! The quality of your work has been improved!
All the best
Author Response
Comments: Thank you very much for accounting for the comments I have provided! The quality of your work has been improved!
Reply: We deeply appreciate the reviewer’s comment and will do our best to state clearly the core idea of our paper!
