Farmland Leasing, misallocation Reduction, and agricultural total factor Productivity: Insights from rice production in China

•Reducing factor misallocation can increase agricultural productivity and farmer income.•A theoretical framework shows how farmland leasing affects aggregated TFP.•Efficient factor reallocation could theoretically result in a 23.6% increase in TFP.•An 1% increase in farmland leasing leads to a 1.087% gain in aggregate TFP.•An 1% increase in farmland leasing results in a 0.267% reduction in misallocation. Reducing factor misallocation is crucial for enhancing agricultural aggregate total factor productivity (TFP) and narrowing the income gap between urban and rural areas in China. This paper presents a theoretical framework illustrating how farmland leasing affects aggregated TFP via the reduction of misallocation. Utilizing a comprehensive dataset of cost and benefit survey for Jiangsu rice farmers, monthly surface climatological data, and soil characteristic information from FAO, this study finds that efficient factor reallocation could theoretically result in a 23.6% increase in aggregate TFP. In practice, a 1% increase in farmland leasing leads to a 1.087% gain in aggregate TFP and a 0.267% reduction in misallocation using IV regression. These effects become larger after the Three Rights Separation (TRS) reform compared to prior conditions. The mediation effects of farmland leasing on TFP through misallocation reduction are only observed in Southern Jiangsu, possibly due to farmland concentration.