Land Property Rights, Financial Frictions, and Resource Allocation in Developing Countries

Résumé

What effect do weak land property rights and limited access to finance have on aggregate productivity and the allocation of resources, and what is the role of their interaction? To answer these questions, I develop a dynamic general equilibrium model and use it to quantify the aggregate and distributional impacts of land and financial market imperfections. I discipline the model with longitudinal microdata from Tanzania and show that substantial frictions in land and financial markets affect resource allocation and economic efficiency in agriculture. In the model, these distortions reduce aggregate productivity by affecting the allocation of land and capital to less efficient producers; and by preventing households from moving out of agriculture and limiting entrepreneurship. An economywide land reform that improves land property rights leads to increases in agricultural and non-agricultural output by 7.4% and 8.2%, respectively, as well as a decline in agricultural employment by 8.6%. A land reform also results in higher financial inclusion, especially among the poorest, as land market frictions amplify the effects of financial markets imperfections. While a financial reform can deliver comparable aggregate effects, land reform is more pro-poor and reduces consumption inequality.