Misallocation in Indian Agriculture

We exploit substantial variation in land-market institutions across Indian states and detailed household-level panel data to assess the effect of land-market distortions on agricultural productivity. We develop a model of heterogeneous farms and distorted land markets, featuring (a) state-level barriers to land-market participation and (b) idiosyncratic (farm-level) distortions to farm size. We use the framework to separately identify and estimate the two sources of land-market distortions in each state using farm data on productivity, land endowment, land-market participation, and operational farm size. We find substantial differences across states in rental barriers with large negative effects on agricultural productivity. An efficient reallocation of land in India increases agricultural productivity by 65 percent and by more than 100 percent in some states, with more than 50% of these effects attributed to state-level rental barriers. Distortions associated with land-market participation contribute substantially to agricultural productivity differences across Indian states.