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The Effects of Land Markets on Resource Allocation and Agricultural Productivity

Chaoran Chen, Diego Restuccia, Raül Santaeulàlia-Llopis

NBER Working Paper No. 24034
Issued in November 2017, Revised in October 2019
NBER Program(s):Development Economics Program, Economic Fluctuations and Growth Program, Productivity, Innovation, and Entrepreneurship Program

We assess the effects of land markets on misallocation and productivity by exploiting policy-driven variation in land rentals across time and space arising from a large-scale land certification reform in Ethiopia, where land remains owned by the state. Our main finding from detailed micro panel data is that land rentals substantially reduce misallocation and increase agricultural productivity. Our evidence builds from an empirical difference-in-difference strategy, an instrumental variable approach, and a calibrated quantitative macroeconomic framework with heterogeneous household-farms that replicates—without targeting—the empirical effects. These effects are nonlinear—impacting more farms farther away from efficient operational scale, consistent with our theory. Using our model, we find that more active land markets reduce inequality, an important concern for the design of land policy. We also find that the positive effects of land markets are mainly driven by formal market rentals as opposed to informal rentals. Finally, our analysis also provides evidence that land markets increase the adoption of more advanced technologies such as the use of fertilizers.

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Document Object Identifier (DOI): 10.3386/w24034

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