APPLIED MICRO: Social Networks and Factor Trade in Rwandan Agriculture; Professor Jeremy R. Magruder (University of California, Berkeley)

Abstract

We analyze bilateral frictions in agricultural land and labor markets in Rwanda. Similar to other lower income contexts, we find that land and labor are misallocated, despite strong property rights and a high degree of activity in Rwandan factor markets.  We demonstrate that land and labor transactions boost allocative efficiency, but only modestly.  To unpack misallocation, we use a novel transaction-level panel dataset to examine who trades with whom.  First, within small villages, physical distance and social connectedness are important predictors of factor trade. Second, frictions in land and labor markets are different: transactions that boost allocative efficiency in hiring are concentrated among nearby households, while transactions that boost allocative efficiency in rentals are concentrated among the socially connected.  We separate iceberg costs of trade from matching frictions in a quantitative trade model: while both proximity and social connections reduce iceberg costs, social connections reduce matching frictions in the land market.  Evidence from an RCT, panel data, and qualitative reports suggest these frictions are not easily resolved through policy.