The Effects of Land Markets on Resource Allocation and Agricultural Productivity

We assess the role of land markets on factor misallocation in Ethiopia—where land is owned by the state—by exploiting policy-driven variation in land rentals across time and space arising from a recent land certification reform. Our main finding from detailed micro data is that land rentals significantly reduce misallocation and increase agricultural productivity. These effects are nonlinear across farms—impacting more those farms farther away from their efficient operational scale. The effect of land rentals on productivity is 70 percent larger when controlling for non-market rentals—those with a pre-harvest rental rate of zero. Land rentals significantly increase the adoption of new technologies, especially fertilizer use.