Economics Research Seminar Series: Tom Wilkening, University of Melbourne

Tom Wilkening, University of Melbourne

Topic

Market Design for Land Trade: Evidence from Uganda and Kenya

abstract

Agriculture in low-income countries is characterized by misallocation of land across farmers, and fragmentation – the separation of farms into smaller plots – which increases costs and limits the use of increasing returns technologies. We argue that a carefully-designed set of trading rules can address these problems, and test this using two lab-in-the-field experiments with smallholder farmers in Uganda and Kenya. First, with survey data, we document that agricultural land markets are thin, prone to exposure risk, and suffer from coordination frictions. These characteristics typically hamper decentralized trade. Market design may improve outcomes by thickening markets, finding chains, and enforcing conditional contracts, but right-in-theory designs may be unfamiliar and hard for farmers to understand. Our first experiment, conducted in Uganda, simulates status quo land markets and confirms severe inefficiency. In a second phase of the experiment we find that a centralization intervention can eliminate direct exposure losses that arise through trade and promote consolidation but does not reduce misallocation. We then test whether designs that are more tailored to the land trade problem, but potentially harder to understand, can further improve outcomes. Our second experiment, in Kenya, finds that a computerized package exchange, which allows traders to specify a sequence of conditional trades as a single transaction, performs particularly well. Our results suggest that improved market design can reduce frictions and lead to important productivity gains among smallholder farmers, and may help unlock gains from complementary programs like titling.