Land Misallocation and Productivity

Using detailed household-level data from Malawi on physical quantities of outputs and inputs in agricultural production, we measure total factor productivity (TFP) for farms controlling for land quality, rain, and other transitory shocks. We find that operated land size and capital are essentially unrelated to farm TFP implying substantial factor misallocation. The agricultural output gain from a reallocation of factors to their efficient use among existing farmers is a factor of 2.8-fold nationwide and 1.8-fold within enumeration areas, the narrowest geographical category in our data. Constructing a panel to estimate household-farm productivity that controls for transitory variation such as potential measurement error, the agricultural output gain is still quite substantial, between 1.7 to 2.0-fold, while the pattern of misallocation of near zero correlation of inputs and productivity remains essentially the same. We also provide suggestive evidence of the connection between misallocation and land markets and illustrate how an efficient allocation can substantially reduce agricultural income inequality and poverty.