Expropriation and the Location of Farmland Investment: a theoretical investigation into the Land Rush

Accompanying a sharp rise in food prices between 2007 and 2008 were reports of land deals in the global South. The sudden rise in land acquisitions in developing countries has drawn the attention of scholars and think tanks. In particular, a set of recent papers by Deininger (2011), Deininger (2013), and Arezki et al. (2013) sought to understand the empirical determinants of the land rush. They find that investors tend to target countries that have weak land-governance institutions, understood as the degree to which local land rights are upheld. This is a puzzle, given the economic literature on investment location. By locating in a country with weak land-governance, investors may be foregoing other advantages that generate more revenue. What does such a result say about both the nature of the investment projects, and the productive characteristics of the target countries? In this paper, I attempt to answer these questions using a game-theoretic model where investors can use expropriation as a credible threat, consistent with case studies and empirical data from actual land deals. I show that the credible threat of expropriation lowers the investor’s cost of locating to a country by reducing the necessary remuneration to smallholders for access to land, resulting in adverse incorporation. Further, I show that investors will locate in countries with weak land governance whenever they anticipate similar levels of revenue among the set of countries they target, or, whenever they can guarantee a similar level of investor protections.