Land market distortions: theory and evidence from Guatemala

Farm size and land allocation are important factors in explaining lagging agricultural productivity in developing countries. This paper formally examines the effect of land market distortions on the allocation of land across farmers and overall agricultural productivity. We first develop a theoretical framework to model the optimal size distribution of farms and assess to what extent market distortions can explain nonoptimal land allocation and output inefficiency. We then calibrate the model to the case of Guatemala and evaluate potential drivers of the distortions across locations. We find that aggregate agricultural productivity across regions is over the range of 54-95% of the efficient output for different major crops considered. We evaluate alternative factors correlated with these distortions and provide some policy recommendations to improve efficiency.