Poverty Traps, Structural Transformation, and Rural Land Concentration in India; Prashant Bharadwaj (University of California, San Diego)

Abstract

Using the universe of land records from a large Indian state we document three empirical facts on rural land holding concentration at the village level in India: 1) rural land holding concentration is higher close to urban areas and decreases with distance from urban centers, 2) the increase in land concentration near urban areas is due to fewer medium sized farmers (i.e. more small and large farmers near urban areas), and 3) the distance to urban area-land holding concentration relationship depends positively on the size of the urban area. A simple model where individual farmers face financial frictions, a U-shaped production function in land size and farm productivity, and costly migration explains these patterns. In this setup, farmers choose between continuing to farm and migrating to the urban center each period. Medium-sized farmers near urban centers find it profitable to sell their land to large farmers. Financial frictions are a key factor behind small farmers remaining small. The interaction of financial frictions with the U-shaped production function in farming implies that small farmers do not find it profitable to move to the urban areas either. Using data on bank access at the village level, we find suggestive evidence towards this mechanism. Our empirical patterns and model shed much-needed light on questions related to the preponderance of small farms in developing countries, poverty traps, structural transformation, and the market frictions that might generate these.