Misallocation in Indian Agriculture
We exploit substantial variation in land-market institutions across Indian states and detailed micro household-level panel data to assess the effect of distortions in land rental markets on agricultural productivity. We provide empirical evidence that states with more rental-market activity feature less misallocation and reallocate land more efficiently over time. We develop a model of heterogeneous farms and land rentals to estimate land-market distortions in each state. Land rentals have substantial positive effects on agricultural productivity: an efficient reallocation of land increases agricultural productivity by 38 percent on average and by more than 50 percent in states with highly distorted rental markets. Both farm and state-level land market distortions are quantitatively important, with state-level wedges accounting for a significant fraction of rental market participation differences across states. Land market distortions contribute about one-third to the large differences in agricultural total factor productivity across Indian states.
We thank Murat Celik, Joseph Cummins, Doug Gollin, Steven Helfand, Serdar Ozkan, Xiaodong Zhu, and seminar participants at the University of Toronto, Oxford, UC Riverside, and Bristol for useful comments and suggestions. All errors are our own. Bolhuis acknowledges the support from the Ontario Trillium Foundation and thanks the Department of Economics and the Centre for the Study of African Economies at the University of Oxford for their hospitality while writing this paper. Restuccia acknowledges the support from the Canada Research Chairs program and the Bank of Canada Fellowship program. The views expressed herein are those of the authors only and do not necessarily represent the views of the Bank of Canada and the IMF, its Executive Board, IMF management, or the National Bureau of Economic Research.