Insecurity of Property Rights and Matching in the Tenancy Market

This paper analyzes the effects of insecure property rights over land on the functioning of the land rental market in the Dominican Republic. It shows that insecurity of property rights not only reduces sharply the level of activity on the land rental market, but also causes market segmentation. A principal-agent framework is used to model the landlord’s utility maximization, where he takes into account the risk of losing the land when it is not traded within a narrow local circle of confidence. Using data collected with a methodology that enables to characterize the entire market, we show that insecure property rights lead to matching in the tenancy market along socio-economic lines and hence severely limit access to land for the rural poor. Simulations suggest that improving tenure security would increase the total area rented to the poor by 63%. While a small fraction of this gain is achieved via formal titling, most is obtained through reducing conflicts over land and enhancing protection of property rights. Results also show the importance of minimum working capital endowments for the poor in gaining access to land in the rental market.