A large and primarily theoretical literature explores how wealth inequality interacts with financial frictions in the process of economic growth. Existing work on this topic has paid limited attention to the role of land, which is particularly important in developing economies. Land is the key productive asset in agricultural production, which represents a large share of the economic activity in low-income countries. Land markets in low-income countries are also highly frictional. Institutional and cultural factors hinder the rental and sale of land in many contexts. In our project, we aim to empirically and theoretically study the relationship between land ownership inequality and local economic development in the presence of frictions in both land and financial markets.
We use detailed individual-level land ownership data matched with census data sources for one large state in India to empirically examine the cross-sectional relationship between village-level landholding inequality with rural structural transformation in India. We find that land inequality is positively associated with agricultural productivity and non-agricultural labor allocations in the same village. Higher agricultural productivity and non-agricultural labor allocations are driven by irrigation investments and entrepreneurship which tend to require upfront capital investments. Using STEG funding, we are collecting village-level data on wages to further characterize the impact of landholding inequality on local labor markets. To explain these empirical findings, we posit a theoretical framework connecting land inequality with the local structural transformation process. We are developing a dynamic general equilibrium model in which land ownership inequality interacts with land and credit market frictions in the presence of upfront fixed-cost investments. Land and credit frictions interact through the self-financing mechanism: land ownership in providing agricultural income to finance productive investments in agriculture and non-agricultural firm entry.
Our project contributes both empirical evidence and a theoretical framework to improve our understanding of the role of frictions in land markets and credit markets as well as their interaction in hindering local economic development in low-income countries. We plan to calibrate the model to quantify the effectiveness of relevant policy reforms such as land redistribution and reducing credit market frictions.
Project
• Research Theme 1: Firms, Frictions and Spillovers, and Industrial Policy,
Research Theme 3: Agricultural Productivity and Sectoral Gaps,
Cross-Cutting Issue 3: Inequality and Inclusion
Land Inequality and Rural Structural Transformation: The Role of Frictions in Land and Credit Markets
Active project
PhD Research Grants
Research Team
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