The Effects of Land Markets on Resource Allocation and Agricultural Productivity

We assess the effects of land markets on misallocation and productivity by exploiting effective 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 and a calibrated quantitative macroeconomic framework with heterogeneous household-farms that replicates—without targeting—the empirical effects, an outcome that externally validates our model. The empirical effects are nonlinear—impacting more farms farther away from efficient operational scale, consistent with our theory. Further, counterfactual model experiments suggest that the land reform reduces income inequality, is relatively scalable and explains a sizeable proportion of the full extent of misallocation. Additional insights on the role of (in)formality in land markets and its effects on technology adoption are provided