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Presentation Title: Understanding Misallocation in Active Factor Markets: Causes and Consequences for Irrigation in Rwanda
Abstract:
We investigate land and labor misallocation in the context of newly-installed hillside irrigation systems in Rwanda. First, we use a spatial regression discontinuity design to demonstrate that hillside irrigation is used to grow vegetables in the dry season, which is associated with a 43-62% increase in cash profits. Yet, we also observe that farmers only irrigate 30% of plots, even though access to water is provided for free. We demonstrate that this pattern is inefficient and represents misallocation, driven by frictions in land and labor markets.
The importance of these frictions is surprising, given that land is formally titled and both land and labor markets are active in this context. Using a novel transaction dataset linked to a social network map, we demonstrate that a dominant share of land and labor contracting takes place very locally within social networks and that network centrality is a strong predictor of hiring labor and land. As network centrality is only weakly correlated with TFP, this results in common land transactions which do not enhance efficiency. Moreover, homophily in the network restricts the potential for profitable trade.
Contact Nilesh Fernando for information.