Do Land Market Restrictions Hinder Structural Change in a Rural Economy?

This paper analyzes the effects of land
market restrictions on structural change from agriculture to
non-farm in a rural economy. This paper develops a
theoretical model that focuses on higher migration costs due
to restrictions on alienability, and identifies the
possibility of a reverse structural change where the share
of nonagricultural employment declines. The reverse
structural change can occur under plausible conditions: if
demand for the non-agricultural good is income-inelastic
(assuming the non-farm good is non-tradable), or
non-agriculture is less labor intensive relative to
agriculture (assuming the non-farm good is tradable). For
identification, this paper exploits a natural experiment in
Sri Lanka where historical malaria played a unique role in
land policy. The empirical evidence indicates significant
adverse effects of land restrictions on manufacturing and
services employment, rural wages, and per capita household
consumption. The evidence on the disaggregated occupational
choices suggests that land restrictions increase wage
employment in agriculture, but reduce it in manufacturing
and services, with no perceptible effects on self-employment
in non-agriculture. The results are consistent with the
migration costs model, but contradict two widely discussed
alternative mechanisms: collateral effect and property
rights insecurity. This paper also provides direct evidence
in favor of the migration costs mechanism.