Effect of Ceiling Size on Land Acquisition and Capital Investment- Evidence from Indian States

Transferring land from (relatively low productivity) agriculture to industry has proved to be difficult in many less developed countries. This is the first paper to document the role of legislated ceiling size in explaining this puzzle, arguing that these legislations made land acquisition for factories more difficult, with resultant effect on capital investment and the pace of industrialisation in the Indian states. Ceiling legislations, whether implemented effectively or not, had led to increased land fragmentation, thereby increasing the transactions costs of acquiring land (for strategic and non-strategic reasons). We use a simple general equilibrium framework to argue that states with smaller ceiling size tend to have (i) lower fixed and total capital-output ratio; (ii) lower investment in total capital; and (iii) lower pace of industrialisation. Exploiting the exogenous variation in legislated ceiling sizes across states and over time, our estimates support the key hypotheses of the theoretical model, conditional on a set of controls. Our analysis offers important recommendations on how to reduce transactions costs of land acquisition, policies that we claim are applicable beyond India