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This paper looks for the possible explanations for the land productivity differential between high caste and low caste farm households in Nepal. The paper indicates that caste position still plays a vital role in rural areas of Nepal.The paper finds that: land productivity is higher among low caste households. However, in case of owner-operated plots, the land productivity differential between low caste and high caste is found to be insignificant after controlling for land quality and household characteristics. This difference remains highly significant in case of rented in plots. In case of all plots, the land productivity difference between high caste and low caste remains significant. Persistence of productivity differential even after land-rental market participation is perceived by the paper as an indication of significant transaction costs in the land-rental market. Improvement of land-rental market is an appropriate policy for poverty reduction and efficiency. Furthermore, land-rental market helps reduce productivity differential by increasing access of the poor households to land. Accordingly, one way of improving the land-rental market is to design the policy in such a way that landlords do not hesitate to rent out land with a formal contract due to fear of losing full or partial ownership of land. The paper suggests that reducing caste-based inequality may improve the overall productivity in agriculture. There is a need, both at central and local level, to make policies to ensure social inclusion and bringing low caste in the mainstream of development by improving their access to economic resources.
