Question

Explain precisely how and why the moral hazard may arise in rural land contract in developing countries.

Answer 1

In developing countries, there are vast area of rural land that can be issued to the companies for development and setting manufacturing hubs. It creates moral hazard, as seller of the rural land is protected, of the risk that is created to the local agrarian economy, bio diversity and natural environment. Here, seller is protected as he or she can buy another piece of land using some part of the funds and get settled. Though, the habitat of the rural land, will suffer.

Moral hazard will take place, because buyer will ensure to get the full return upon the investment. Hence, buyer of the rural land, will develop the land on the basis of terms and conditions of the contract, even if it comes at the cost of well being of the natural habitats of the area.  Though, it is not well checked by the law making authorities as it is still in evolving stage in the developing countries. It is the reason that China is going to revise its rural land contract laws.