Abstract

We assess the role of land markets on factor misallocation in Ethiopia -where land is owned by the state- by exploiting policy-driven variation in land rentals across time and space arising from a recent land certification reform. Our main finding from detailed micro data is that land rentals significantly reduce misallocation and increase agricultural productivity. These effects are nonlinear across farms -impacting more those farms farther away from their efficient operational scale. The effect of land rentals on productivity is 70 percent larger when controlling for non-market rentals -those with a pre-harvest rental rate of zero. Land rentals significantly increase the adoption of new technologies, especially fertilizer use.