Equity and efficiency impacts of rural land rental restrictions: Evidence from India

1
Equity and efficiency impacts of rural land
rental restrictions Evidence from India
Land Policies Legal Empowerment of the
Poor Nov 3, 2006 H.K. Nagarajan, Klaus
Deininger, Songqing Jin
2
Background Motivation

• Rental markets Concepts Empirical evidence
• Transfer (temporary) to better cultivators low
  risk
• Facilitate link to off-farm economy
  consolidation of holdings
• Rapid expansion with economic growth (China,
  Vietnam)
• But Limited extent in India why and what to do
  about it?
• Questions to be addressed
• Origin justification of rental restrictions
• Are land markets still backward exploitative?
  
• What is the equity/efficiency impact of rental
  restrictions?
• Methodology
• Simple household model of land market
  participation
• Use of state-level variation in rental
  restrictions
• Measure for household ability to assess
  productivity impact

3
Origin nature of rental restrictions

• Land-reform related interventions
• Elimination of intermediaries
• Ownership ceilings
• Tenancy reform Rent ceilings tenancy rights
• Variations in implementation effort
• Slow implementation
• Many loopholes
• Limitations in scope
• Evidence on impact
• Nation-wide state level regressions
• West Bengal?
• Second generation problems?

4
Evidence on implementation
5
Theoretical predictions

• Rental restrictions in urban areas
• Textbook example for policy distortion
• Benefits sitting tenants reduces mobility
• Reduces investment supply of land to rental
  market
• Social cost will increase over time as demand
  increases
• Reasons for greater importance in rural areas
• Higher elasticity of supply (self or wage
  cultivation)
• Impact on productive efficiency Size
  generational shift
• Sharecropping less flexible with possibly high
  investment impact
• Evidence from studies in India
• Case studies High level of informality
  contravention of law
• Aggregate studies Positive short-term impact of
  reforms
• But no assessment of cost or longer-term effects
  
• This will be needed to guide policy

6
Model Setup

• Households endowed with endowments of labor ( )
  and land ( ), and agricultural ability (?i)
• Households divide labor between farm work and
  off-farm wage employment
• No farm labor market, renting of land incurs
  transaction costs
• Households maximize income by optimizing labor
  allocation and choosing optimal operated land
  size through rental
• Policy restrictions (3 versions) affect
  transaction costs

7
Conceptual framework
8
Data descriptive statistics

• Data sources
• NCAER ARIS/REDS panel data 1982 1999
• About 7,500 obs. in 2 periods
• Household characteristics
• Increased educational attainment (26 to 50)
• Narrowing of N-S gap asset inequality decreased
• Land p.c. dropped income growth of 3 p.a.
• Economic structure
• Agriculture very important (70 to 63)
• Higher participation in agr. wage employment (36
  to 43)
• Share of self-employment broadly constant

9
Key household characteristics by region
10
Rental Activity and Determinants

• Rental market activity
• Increase in overall activity (5 to 10 out)
• More hhs renting than benefited from reform
• Increased share of landless (12 to 37)
• Characteristics by nature of market participation
  
• Asset-poor rent in, rich rent out
• Gap narrowed slightly over time in panel
• High share of wage workers renting in

11
(No Transcript)
12
Determinants of market participation

• Overall equation
• Landless and poor, labor abundant likely to rent
  in
• Education, village income increase renting out
• Ability increase rent-in robust to inclusion
• No minimum wealth requirement input/credit
  market
• Lower bound (out to autarky)
• Policy variables More autarky laws lt implement.
• SC/ST increases time decreases transaction
  costs
• Upper bound (autarky to in)
• Implementation, but not law increases autarky
• Autarky areas decreased, i.e. markets more active
• But long time to offset impacts of restrictions

13
(No Transcript)
14
Equity efficiency impacts

• Why expect differential impacts?
• Circumventing restrictions easier for rich than
  poor
• Is there a trade-off between equity efficiency?
  
• Empirical results
• Restrictions wipe out advantage of landless in
  accessing land
• Once this accounted for, no more effect of
  legislation
• Robust to inclusion of ability
• Increases autarky band for higher ability people

15
(No Transcript)
16
Variation over time equity impact

• Is there a justification for restrictions?
• Wealth bias in 1982, no more in 1999
• No reverse tenancy, increased supply by large
  owners
• Monopolistic landlord behavior to extract rent?
• Potential equity impact of rental access
• Mean return/labor day close to R 150 ( VMPL)
• Compare to wage rate for ag. labor R 46 or 34
• -gt Significant welfare gains, especially for women

17
(No Transcript)
18
Conclusion and policy implications

• Land rental market functioning
• Improve equity and efficiency
• Wealth bias eliminated over time
• But impeded by tenancy legislation
• Large benefits from increased access (women)
• Policy implications
• Improve equity efficiency by reducing
  restrictions
• Doing so is not infeasible
• Sitting tenants welfare to be considered
• This can increase welfare significantly but is
  second best to deal with problem of inequality