Abstract
The active land rental market affects inter-household efficiency. Using nationally representative household panel data in China from 2017 to 2019, we estimate rural household efficiency with consideration of diversification, and analyze the effect of land rental market participation on household efficiency using a control function approach. Results show that: (1) the mean technical efficiency and allocative efficiency were 0.45 and 0.64 in 2017 and 0.44 and 0.66 in 2019, respectively, suggesting the existence of efficiency loss; (2) land rented-in activities improve rural households' technical efficiency but not allocative efficiency; (3) land rented out activities decrease household technical efficiency but increase allocative efficiency. Further analysis showed that farm size heterogeneity might be the main reason for the efficiency difference. Households with large farms and plot sizes on rented land have significant advantages in technical efficiency and insignificant impacts on allocative efficiency. The results explain why the land rental market promotes efficient land transfer, but households with a large farm size are still rare in rural areas. Finally, we provide suggestions on how to stimulate the land rental market under diversification circumstances.